The yen rose against the dollar after Standard & Poor's cut Japan's credit rating by one step instead of the two it considered in September.
The yen strengthened to 123.10 per dollar, from 124.11 in London late yesterday. It rose against the euro to 109.03 from 109.38. The yen has fallen 7.4 percent against the dollar and 1.5 percent against the euro this year. The dollar fell to 88.53 cents per euro, from 88.21.
S&P's reduction brought Japan's rating to ``AA,'' the agency's third-highest ranking. It said another cut is likely because of Prime Minister Junichiro Koizumi's ``slow progress'' on election promises to end the country's 11-year economic slump.
``The change was better than expected,'' which is helping the yen, said Murray Gunn, foreign-exchange investment director at Standard Life Investments in Edinburgh, Scotland, where he helps manage 78 billion pounds ($111 billion).
Chang Yu-Tsung, S&P's head of credit-market services, told Jiji Press last week the company was considering a two-step reduction. The Financial Times today reported the agency might have downgraded Japan by three levels.
``The clouds are seriously darkening'' over Japan, said Steven Saywell, a currency strategist at Citigroup Inc. A further cut would mean ``foreign investors will be less attracted to sovereign debt.''
`Slow Progress'
Japan's currency may have a tough time pushing much higher, traders said, as the reduction puts Japan with Italy as the lowest- rated members of the Group of Seven industrial nations.
Declining purchases of Japanese bonds by overseas investors also may reduce demand for the yen. International money managers, who according to analysts hold about 4 percent of Japanese government bonds, sold more of them than they bought in the week ended Nov. 16, for the first time in six weeks.
The yen's rise against the dollar was supported by concern the U.S. economy faces a slow climb out of its first recession in a decade, and by comments from Federal Reserve Governor Laurence Meyer yesterday, analysts said.
Fed policy makers have room to lower the benchmark overnight interest rate and shouldn't refrain from doing so just because it's at a 40-year low of 2 percent, Meyer said.
``The yen was helped by the fact there is pressure on the dollar after the consumer-confidence figures and Meyer's comments,'' Standard Life's Gunn said.
`Economic Bogeys'
A report yesterday showed U.S. consumer confidence fell in November to the lowest level in 7 1/2 years. Reports this week are expected to show a rise in initial jobless claims and that the largest economy shrank more than originally estimated in the third quarter, economists surveyed by Bloomberg News said.
``There are more economic bogeys out there on the U.S.,'' said Stacey Seltzer, a currency economist at Brown Brothers Harriman & Co. ``People are now a bit more cautious about the recovery.''
First-time claims for unemployment benefits probably rose to 440,000 in the week ended Saturday from 427,000 the previous week, a Labor Department report is expected to show on Thursday.
A revision of third-quarter U.S. gross domestic product, due on Friday, will probably show the largest economy shrank 1 percent, more than the 0.4 percent decline the government estimated last month, economists surveyed by Bloomberg News said.
Investors pushed the dollar to a 17-week high against the yen yesterday amid speculation the Japanese economy will falter in coming months while the U.S. economy recovers.