(Updates prices, adds quotes and links, changes byline and dateline; previous LONDON)
* USDJPY rises to highest level since July 2011
* Importers buying dollars, stops triggered above 80.41 yen
* Euro hits 2-1/2 mth high vs dlr on short covering rally
New York (Frankfurt: A0DKRK - news) , Feb 24 (Reuters) - The yen slumped to multi-month lows against the dollar and euro on Friday after reports Japanese importers sold the yen and key technical levels were breached.
The yen has been on a downward trajectory for over a week on monetary easing by the Bank of Japan (EUREX: FMJP.EX - news) , the country's shrinking current account surplus, interest rate differentials with the United States and rising crude oil prices.
The euro gained against the dollar as investors sought to cover short positions after this week's bailout deal for Greece and better-than-expected German data.
"The move in both the euro and yen right now is more a positioning squeeze than anything else," Greg Anderson, G10 strategist at CitiFX, a division of Citigroup (NYSE: C - news) , in New York said.
"People were using euro shorts to fund long positioning in the Australian and Canadian dollars and now we are seeing those positions get unwound," he said. "Not much has changed on the news front, but the break of critical moving averages has caused some powerful cleansing of crosses."
He added, "Squeezes almost always bite the hardest on Friday, and today comes before the weekend's G20 meeting."
Policymakers from the Group of 20 nations will meet in Mexico City this weekend. The meeting will be dominated by the euro zone debt crisis, although officials also have on the agenda the global economic outlook.
The dollar hit a fresh 7-1/2 month high of 80.77 and last traded at 80.74, up 0.9 percent on the day, pulling further away from the 2012 low of 76.03 hit on Feb. 1, according to Reuters data.
Anderson said the he expects the yen's drop to reverse and expects a new floor to be set at 78.00 or 79.00.
Short-term players triggered weak stop-loss orders above Wednesday's peak of 80.41, helping the dollar break above a major chart resistance point of 80.42 yen, which is the 50 percent retracement of its fall from the 2011 high around 85.50 yen to the all-time low of 75.31 yen.
The euro rose to a fresh 3-1/2 month high of 108.81 yen , far above this year's low of 97.04 yen hit on Jan. 16. It last traded at 108.72, up 1.6 percent on the day.
"The move in dollar/yen came because the Bank of Japan's easing policy came as a surprise to the market," said Steve Barrow, currency analyst at Standard Bank.
However, he said the limited scope for a further widening in Japanese-U.S. yield differentials meant it wouldn't move too much higher. Dollar/yen traditionally has a strong correlation with short-term Japanese-U.S. yield spreads.
"Probably in the short-term it will turn around because there is a danger of risk aversion coming back in that could support the yen".
U.S. Treasury yields are not expected to rise much further due to the Federal Reserve's pledge to keep rates exceptionally low until at least 2014, while Japanese 2-year government bonds are already extremely low.
EURO GAINS VS DOLLAR
Against the dollar the euro extended hefty gains made a day earlier after an improved German Ifo business sentiment survey triggered a short-covering rally, where players give up on bets that the currency will weaken.
The euro was last up 0.7 percent on the day at $1.3462, just off a peak of $1.3475, a fresh 2-1/2 month high.
Market players said the euro rally had good momentum after it broke through the 100-day moving average around $1.3306 on Thursday, and took out a reported option barrier at $1.34 in early European trade on Friday.
Analysts said the euro's resilience was helped by better risk appetite ahead of the European Central Bank's second long-term, low-rate refinancing operation next week, while traders also reported broad dollar selling except versus the yen.
Worries about the euro zone economy persist. Although the Ifo data raised hopes the German economy was picking up, the European Commission warned the euro zone as a whole is likely to be heading for recession.
The European Central Bank needs to see the impact of its double-dose of ultra-cheap three-year funding before taking any further policy steps and there is no need for action now, ECB Governing Council member Ewald Nowotny said on Friday.
(Additional reporting by Nia Williams in London; Editing by Kenneth Barry)
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