The yen rose towards a one-month high against the dollar on Monday after soft U.S. growth data and as traders looked to the release of a Bank of Japan economic outlook report for clues about when Japanese interest rates will climb further.
Investors covered short yen positions as the dollar fell out of favour at the end of last week after disappointing third quarter growth figures and a Federal Reserve policy meeting that suggested a rise in U.S. rates in the near future was unlikely.
Some analysts said that the yen could continue to appreciate as market participants perk up to the possibility that Japanese rates could soon rise.
"We could be seeing a change of trend," said Toru Umemoto, chief FX strategist at Barclays Capital in Tokyo. He said that the market was beginning to warm to the Japanese currency after the dollar had failed to climb to the key 120 yen level in the past month, while the euro/yen had pulled back from a record peak hit on Friday.
The yen was also supported following comments by Japan's top financial diplomat on Friday that traders regarded as a verbal attempt to stem falls in the Japanese currency. The dollar was at 117.40 yen as of 0620 GMT, down from around 117.60 yen in late U.S. trading on Friday, when it fell to a 1-month low of 117.13 yen on electronic trading platform EBS.
The euro fell to 149.30 yen from around 149.80 yen, off the record high of 150.80 yen hit on Friday. The yen showed little reaction to data showing Japanese industrial production fell 0.7 percent in September from a month earlier, a result mostly in line with a median market forecast for a decline of 1.0 percent. The euro slipped to $1.2720 , still within sight of Friday's high of $1.2751, the highest in over three weeks.
The U.S. Commerce Department said on Friday that U.S. economic growth in the third quarter slowed to 1.6 percent, its weakest pace in over three years.
The data strengthened expectations that the Fed would not raise interest rates again and stirred some speculation that they might even cut rates in early 2007 to boost growth.