The dollar rounded out its best week in the past seven against the yen on hopes the war in Afghanistan may end soon and amid signs of recovery in the US economy.
US-backed opponents of the Taliban gained ground in Afghanistan this week, easing concern a prolonged war would damage US consumer confidence and make investors shun the world's biggest economy. A better-than-forecast retail sales report also heightened optimism for US prospects.
"There's a general feeling it's moving in the right direction," Nigel Jenkins, head of fixed income and currencies at WestAM in London, said of the war in Afghanistan. Combined with "a very significant reappraisal" this week of chances for a US economic rebound, that has fueled dollar buying, he said.
The greenback rose to ?122.83, from ?122.40 on Thursday, and gained 2 percent from last Friday, its best showing since September. The dollar slipped to US$0.8841 per euro, from US$0.8817 late Friday in New York. It gained 1 percent this week against the euro, the largest advance in a month.
Also triggering yen selling was a Kyodo News report that five Japanese credit unions had filed for bankruptcy, said Michael Malpede, senior currency analyst at Refco Inc in Chicago. The report fueled concern that the health of Japan's financial system and prospects for its economy are deteriorating, said traders.
WestAM's Jenkins said his unit, which manages 2 billion euros (US$1.8 billion), sold yen for dollars at about ?120 this week.
The trade was based on expectations Japan's government would prevent the yen from appreciating past that level and on the view that the Bank of Japan in coming months would pump funds into the financial system to help the nation's banks, triggering a yen decline toward 130 per dollar, said Jenkins.
As the opposition to the Taliban gained territory this week, investors bet an eventual victory and the potential capture of suspected terrorist leader Osama bin Laden would reduce the threat of terrorism and leave the US poised to be the first major economy to recover from the global slump.
Better growth prospects in the US economy, which shrank at an annual rate of 0.4 percent in the third quarter, may lure investors to US assets and the currency needed to buy them.
The news from Afghanistan "has certainly removed a lot of global geo-political risk, which you'd expect to benefit the dollar," said Scott Jamieson, who manages US$60 million at Abbey National Plc's Talorcan hedge fund in Glasgow, Scotland. Still, ``in a calmer world, people may move to other currencies and not just put all their eggs in Uncle Sam's basket.''
A record jump in retail sales in October, reported Wednesday, suggested the economy may be better off than previously thought.
Even so, other statistics may call that optimism into question.
A Fed report today showed US industrial production sank 1.1 percent in October, more than the expected 0.9 percent decline and the 13th consecutive monthly drop.
Lending support to the euro, German Chancellor Gerhard Schroeder won a confidence vote in parliament, approving the use of troops to support the US in Afghanistan and avoiding the collapse of his coalition government.
The vote helped the euro because "I don't think you run money to places where they're dissolving governments," said Malpede at Refco.
In coming weeks, traders said they'll be focusing on earnings reports from Japanese banks to gauge how much the institutions' stock holdings have fallen in value in recent months, which could erode the banks' finances.
The US dollar strngthened to US$1.4272 per British pound from US$1.4320, and fell to SF1.6574 from SF1.6613.
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