The dollar continued to rise against the yen on Friday, hitting 3-1/2 month highs, as the market speculated that the U.S. would not object if Japan weakened its currency by selling foreign bonds.
Meanwhile, the euro was up slightly against the dollar, finding support from news that the French economy grew at a stronger-than-expected pace in the third quarter.
But sterling was by far the biggest mover, falling half a percent against the euro and the dollar, as speculation that Britain could join Europe's single currency club mounted ahead of a speech by Prime Minister Tony Blair.
"It's the same story. Dollar/yen's higher on this talk that Japan will consider buying foreign bonds," said Jesper Dannesboe, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein.
"We don't think it's likely as we think it would amount to unsterilised intervention. But the Japanese are probably happy with the market talking about it."
At 0844 GMT, the dollar was trading around 124.09 yen after hitting a high of 124.18, its highest level since August 6, according to data. Tokyo markets were closed for a holiday on Friday.
The euro was trading at $0.8780 , only marginally higher than the previous day's close and not that far above three-month lows set on Wednesday.
Sterling was trading at $1.4050 , a four-month low, and 62.47 pence per euro , its lowest in four weeks.

FRENCH GDP STRONG
Analysts said French gross domestic product data for the third quarter had offered a ray of hope for the euro zone economy.
French economic growth actually accelerated to a quarterly rate of 0.5 percent from a revised rate of 0.2 percent in the second quarter.
This was in contrast to Germany, where data on Thursday showed the economy shrank by 0.1 percent over the third quarter.
"The French numbers were better-than-expected. People are still looking at support at $0.8750 and then $0.8725. On the upside, $0.8840," said Rob Hayward, senior foreign exchange strategist at ABN Amro.
Analysts were waiting for Britain's Blair who is expected to give a pro-single currency speech at 0930 GMT.
"Blair's speech will be seen in the context of the tone of his most recent speeches," said Kamal Sharma, currency strategist at Commerzbank.
"He has been talking a lot about foreign policy coordination, about the war against terrorism -- and against this backdrop, EMU (Economic and Monetary Union) is another form of policy coordination that we can use."