Dollar at three-week high against euro

US fund managers who had been holding European stocks or bonds without a currency hedge might now sell euros to protect against further declines in the 12-nation currency, said Johnson.

European portfolio managers who had sold dollars to protect against currency losses on US assets may now buy those dollars back, he said.

In other trading, the yen rose to ?122.47 per dollar, from ?122.58 yesterday, and to ?107.41 per euro, from ?108.12. Against the euro, the yen reached as strong as ?106.77, its sturdiest since ?106.66 on April 18.

The yen gained about 1 percent this week against the euro, after a 2.3 percent rally last week.

Record support for the administration of Junichiro Koizumi, Japan's new prime minister, has sparked enthusiasm that the government may be able to carry out plans to push banks to write off bad loans and other steps to revive growth.

Foreign investors have funneled funds into Japan in recent weeks, including purchases of yen.

Foreigners bought a net ?427 billion (US$3.5 billion) in Japanese stocks last week, the seventh straight week of inflows and the biggest one-week surge since December 1999.

The yen has fluctuated between about ?120 per dollar and ?125 per dollar for much of the past two months, and Bank of Tokyo Mitsubishi Ltd. expects that range to hold for the next three months.

Japanese investors' dollar purchases will likely prevent a decline below the ?120 level, Bank of Tokyo Mitsubishi's currency analysts in London wrote. The US currency probably won't rise past ?125, though, as Japanese exporters sell dollars and foreign investors buy yen, they wrote.

Volatility in the yen against the dollar, a reflection of demand for buying options to hedge against swings in the exchange rate, fell today to 10.175 percent on three-month maturities.

That's the lowest volatility level since Nov. 29, just as the dollar was on the verge of breaking out of the ?105-?110 range it had been confined to for most of last year.

In other trading, the US currency rose against the British pound to US$1.4186 per pound from US$1.4220, against the Swiss franc, to SF1.7509 from SF1.7424, and against the Canadian dollar at C$1.5498 from C$1.5431.