Exacerbated by a lack of liquidity and stop-loss selling, theselloff saw the euro touch a five-week low against the yen while the dollar fell a full yen at one stage to a two-week trough.

Against the dollar, the euro did manage to sneak up from10-week lows set during a nasty spill overnight but remained short of safer chart territory atop $0.9190. Traders emphasised that the market was not reacting to aspecific event or to fundamentals, rather this was a good example of what can happen when everyone is positioned the same way. In this case they were all short yen as Japan's economic andpolitical woes seemed overwhelmingly bearish for the currency.

"It's very important to remember that the market was long ofdollar/yen and long euro/yen. When it failed for days to break 110.00 that generated some disappointment and led to long liquidation," said Karl Broecker, head of treasury at Landesbank Baden-Wuerrtenburg in Singapore.

The dollar has repeatedly probed resistance at 109.80 yen thelast three days but in each case was rebuffed by a powerful combination of Japanese exporter offers and Asian and U.S. Banks defending option positions around 110.00.

"But that doesn'T mean that with the current environment ofvery negative sentiment on Japan, we won'T break higher in the end. Next time, we'll take 110.00," said an upbeat Broecker.

His confidence seemed justified as by late afternoon thedollar had rallied to 108.85 yen from a low at 108.25, though that was still adrift of New York's late 109.24. The euro had also come off its 99.20 yen low to stand at99.73 but that was a long way from the 101.60 level held in Tokyo on Tuesday. The action was further confused by wild swings in theAustralian dollar following a surprise 0.25 percent rate hike from the Reserve Bank of Australia.

The Australian dollar had fallen sharply against the yen atfirst to hit 62.43 yen, but rebounded in a vicious short-squeeze this afternoon to stand at 63.54.

-- (Reuters)