The yen rallied to a five-month high against the dollar after Japan's government said the worst of the country's third recession in a decade is over.
Investors snapped up Japanese stocks, fueling demand for yen, after the government said its outlook for growth in the world's second-largest economy improved for a third month because rising exports are helping end a yearlong manufacturing slump.
"Any positive signs in Japan will fuel demand for yen from international investors who've been underweight" Japanese assets, said Grant Wilson, a senior currency trader at Mellon Financial Corp in Pittsburgh.
The yen strengthened 2 percent to ?125.58 per dollar from ?128.13 yesterday, passing the ?126 level for the first time since Dec. 12. It then traded at ?125.73, still its biggest gain since March 7, closing out its fourth weekly climb in five.
Japan's currency climbed 0.8 percent to ?115.86 per euro from ?116.74. The dollar sank to US$0.9217 per euro from US$0.9109, its first time past the US$0.92 level since Oct. 9. The yen gained 1.4 percent this week against the dollar, while the euro rose 0.8 percent.
The benchmark Japanese Nikkei 225 stock average rose for a fourth day, reaching a two-month high and increasing demand from international investors for the currency to buy shares.
"Foreign investors have been getting into Japanese assets," which has helped the yen, said Adrian Cunningham, who helps oversee US$150 million at Abbey National Plc's Talorcan hedge fund in Glasgow, Scotland. The Japanese economy "will be helped by the global recovery, but only in the short-term."
Foreign investors were net buyers of Japanese equities for a fourth week in the four days from May 7 to May 10, according to Tokyo Stock Exchange figures. They bought ?74.3 billion (US$583 million) more in shares than they sold.
A report showed factory use in Japan rose 2.7 percent in the three months ended March 31 from the previous quarter, the biggest increase in almost three years. The rise tracked a 0.7 percent rise in production.
Current account surplus figures this week showed Japan's exports rose a third straight month. The jobless rate also unexpectedly fell in March to 5.2 percent from February's 5.3 percent, a report said last month.
The yen's gains accelerated after Masahiro Kawai, deputy vice minister for international finance, suggested Japanese authorities wouldn't step into the currency markets to sell yen and drive its value lower.
Japan's central bank and government "clearly reject the idea of resorting to a beggar-thy-neighbor intervention policy of driving the yen artificially lower," Kawai said.
Kawai's remarks were a departure from other Japanese officials' concern that the yen's 4.6 percent climb this year may damage the competitiveness of the nation's exporters, and suggestions they may decide to weaken it.
"People didn't expect a Ministry of Finance person to say they're not trying to talk the yen down" to a lower exchange rate, and that sparked further gains for the currency, said Thomas Benfer, a director of foreign exchange at Bank of Montreal.
Traders then had little reaction after Japan's Vice Finance Minister Haruhiko Kuroda said authorities were watching foreign- exchange rates and might take action on the yen if necessary, according to reports by Reuters.
The Bank of Japan last stepped into the currency markets in September, selling ?3.2 trillion (US$24 billion) for dollars and euros, and driving the currency down by more than ?4 in two weeks.
"Kuroda came out and rattled the saber a little bit saying they could come in and sell yen if needed, but there was a very muted response to that," said Mellon's Wilson.
The dollar briefly pared its losses against the yen and the euro after the University of Michigan said its index of consumer sentiment unexpectedly rose in May. It gained to 96, compared with economists forecasts it would read 93, unchanged after a decline in April.
Rising confidence may help ease concerns raised earlier in this week as weaker-than-expected reports, such as a smaller-than-forecast rise in Philadelphia-area manufacturing, damped the outlook for the pace of the US rebound picking up, which hurt demand for investment in dollar-based assets.
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