By Wayne Cole
TOKYO, Nov 26 - The yen was submerged beneath a tide of negative news on Monday while the dollar remained buoyed by optimism on both the U.S economy and the Afghan war.
Ratings agency Fitch dealt the latest blow to Japan, downgrading the country's credit rating to AA from AA-plus and warning of further cuts to come unless there was significant progress toward reform and fiscal consolidation.
Adding insult to injury, Standard & Poor's warned that it might slash Japan's rating by two levels from the current AA+, putting it alongside such noteworthy borrowers as Malta and the Czech Republic.
"We maintain our long-standing recommendation to buy dollar/yen for a test of 125 in the near future...and the year's highs near 126.80 by year-end," said Ken Landon, senior currency strategist at Deutsche Bank.
"Then strap yourselves in for an additional push higher in January-March when the yen has historically been the weakest," he added. It was in this period last year that the dollar extended a rally from 116.00 up to 126.82, while the year before it rose from 101.30 to 111.30 between January and March.
In Tokyo late on Monday the dollar was well positioned to fulfil those expectations at 124.20 yen having hit four-month highs around 124.48 on Friday. Dealers reported some resistance from banks defending knockout options at 124.50 and 125.00 and cautioned that the market was long of dollars having chased it up five full yen in just 10 trading sessions.

MUCH ADO...
Also weighing on the yen was a frenzy of speculation about the Bank of Japan maybe purchasing foreign bonds as part of its monetary policy operations.
While the idea has been around for a while, and always played down by top BOJ officials, it took a new twist last week when the Financial Times reported that the Bush administration would not object if such a measure was used to weaken the yen.
Asked about the report on Monday, Finance Minister Masajuro Shiokawa said the BOJ had not decided on such a move and there were no formal discussions on the matter within the central bank.
Many offshore economists tout a weaker yen as a way to fight deflation, while others here in Japan argue that Japan is too closed an economy for it to have much effect.
Japan's international trade as a share of GDP is the lowest of all OECD nations, meaning it would take a very large fall in the yen to produce the sort of imported price pressures necessary to halt deflation.
Thus while the yen depreciated by over 16 percent from November last year to March, consumer prices have not only gone on falling but the pace of decline has accelerated.
EURO SECOND WORST With bears busy scrapping over the yen, the euro won a reprieve from selling pressure to sit at $0.8791 in late trade, having bounced from 15-week lows around $0.8735 on Friday.
It had been aided on Friday by sales of sterling linked to a pro-euro speech by British Prime Minister Tony Blair. But rumours that he would set a date for a referendum on joining at the event proved wide off the mark, and the pound has since rallied.
In late trade here on Monday sterling had firmed to $1.4149 from four-month lows around $1.4035.
News from Afghanistan was generally dollar-positive with hundreds of U.S. marines taking up position near the last Taliban stronghold of Kandahar.
Traders noted early evidence on the holiday shopping season from the United States also seemed to favour the dollar. Treasury Secretary Paul O,Neill said Friday's post-holiday sales were up four percent from a year ago.
On the other hand, it was possible that the National Bureau of Economic Research could declare this week that the United States was officially in recession.
The committee, which determines the official dates of recessions in the United States, held a conference call on Friday to decide whether the world's largest economy has slid into one.