The yen struck a fresh 15-year high against the dollar and edged closer to a nine-year peak against the euro on Wednesday.

A flare-up in worries over euro zone banks prompted market players to test the will of Japanese authorities to intervene.

Persistent yen buying from investors seeking a temporary refuge in the yen in the face of European bank woes and US slowdown worries helped to push the greenback through a major option trigger below 83.50 yen.   

Among big buyers of the yen was said to be a major Japanese investor, which could be repatriating funds from its investments abroad ahead of its half-year book-closing at the end of September.

'The euro looks precarious again. The dollar will be weak ahead of the mid-term election. That leaves the yen as the only currency to buy especially after (Bank of Japan Governor) Shirakawa made only vague comments about the yen,' a US bank trader said.

BOJ governor Masaaki Shirakawa reiterated on Wednesday his reluctance to return to quantitative easing although he indicated the central bank was weighing its options on how to deal with the economic impact of the yen's strength.   

Finance Minister Yoshihiko Noda repeated his warning that he will take decisive action if necessary. 'Officials are making some comments and perhaps they may be preparing for intervention. But the market does not think they will do it now,' says a trader at a Japanese bank.

The dollar fell as far as 83.34 yen, down 0.5 percent on the day and the cheapest since 1995. Many traders are now eyeing another option barrier at 83.00 as the next target.

The euro  fell 0.5 percent to 105.80 yen at one point, threatening to revisit August's nine-year low just below 105.50.

'The euro's weakness is worrying. If the euro becomes unstable, there could be more selling in euro/yen, which would drag dollar/yen lower too,' said a trader at a Japanese trading house.   

Yen strength has stirred up speculation whether Japan would intervene to dampen it.

Michael Hasenstab, Franklin Templeton's co-director of international bonds, said more quantitative easing steps by Japan were possible and could weaken the yen, and this prompted Templeton to hold on to short yen positions versus the dollar and other Asian currencies.   

'The only source of strength in the Japanese economy is exports. And with the yen sub 90 (per dollar), they will be under extreme pressure,' Hasenstab told the Reuters' Dealing Room online chatroom.   

Japanese capital data showed China continued to buy the yen in July, snatching up a net 640.8 billion yen ($7.65 billion) in Japanese bills, bringing its total net buying year-to-date to 2.3 trillion yen. Reserve diversification by China and some other countries has been a reason behind the yen's rally in the past few months.

The euro was pinned at $1.2710, having dived from $1.2870 on Tuesday and a three-week high of $1.2920 the day before. Traders are now looking for a test of support around $1.2625, though they are not exactly keen to go long on the US currency either. - Reuters