By Richard Baum
SINGAPORE, Nov 26 - A three-month high for Japanese stocks on Monday marked another milestone on financial markets' recovery from the September 11 attacks, as shares rallied across much of Asia and the dollar held strong.
The yen and Japanese bonds softened following a downgrade to Japan's credit rating and threats of more to come, while oil prices sagged again on disappointment over a meagre output cut from Russia.
U.S. Treasury Secretary Paul O'Neill's comments that the struggling U.S. economy was headed for recovery brightened the outlook for stocks, which are already celebrating hopes for a quick end to the war in Afghanistan and signs that the U.S. economy is shrugging off the impact of the attacks.
U.S. stocks rallied in a holiday-shortened session on Friday, giving Tokyo shares an extra lift that took the key Nikkei average back above 11,000 to its highest close since August 28.
The Nikkei 225 <.N225> jumped 3.4 percent to 11,064.30, as investors also took heart from signs that Japanese banks are stepping up long-awaited restructuring efforts.
"Banks are dishing out ugly earnings forecasts, but their stocks are holding firm. This reveals how market sentiment has strengthened," said Masayoshi Okamoto, a trader at Jujiya Securities.
Japanese exporters such as Canon Inc <7751.T>, which rely heavily on the U.S. market for sales and benefit from a weaker yen, gained after U.S. consumers mobbed shopping malls during the Thanksgiving holidays on Thursday and Friday.
"Since the market was already anticipating a possible downgrade by Moody's or S&P, today's rating cut by Fitch was not too surprising," said Hideaki Furumaya, head of the interbank desk at Mizuho Trust & Banking "But the yen's trend is clearly very weak and it's a matter to time before it falls further."
The euro held above Friday's 15-week lows, and was testing around $0.88 in afternoon trading.