The yen continued to edge higher, recovering after Friday's sharp losses as broad dollar weakness and warnings on the carry trade contained in a Bank for International Settlements report over the weekend helped the currency higher. The carry trade is where investors borrow in low-yielding currencies -- most often the yen -- in order to invest in currencies whose countries have higher interest rates. Its recent popularity has caused the Japanese unit to slump to four-and-a-half year lows against the dollar and record lows against the euro. But the BIS issued a warning in its annual report, describing the yen's recent sharp decline as "anomalous" and warning investors that the currency could rise sharply once market sentiment shifts. "There is clearly something anomalous in the ongoing decline in the external value of the yen," the BIS said in its annual report. Analysts also cited reported comments from a Japanese Ministry of Finance official saying that the yen's level should reflect economic fundamentals. Most remain unconvinced that the yen's brief rally will last, however, with no sign of Japanese interest rates rising above their current very low level any time soon. "What the MoF and Bank of Japan fail to understand is that the yen is reflecting the fundamental picture that its rates are less than others and as a result the unit provides a valuable tool in the funding of other positive yielding positions," said Matthew Foster-Smith at Thomson IFR Markets. Meanwhile, the pound earlier scaled the 2 dollar mark again for the first time since May 1, though it failed to make a sustained break above that key level. The pound has been on the rise since Wednesday's minutes to the June meeting of the Monetary Policy Committee -- when rates were left on hold at 5.50 pct -- revealed that four of the nine members of the rate-setting body voted for a quarter point hike, including Bank of England governor Mervyn King. This leaves a strong likelihood of a rate hike to 5.75 pct at next month's meeting, with the market increasingly mulling the prospect of further rises to 6 pct or even beyond before the end of the year. "Sterling has been a major beneficiary of the forex market's current high sensitivity to changes in interest rate expectations," said Steve Pearson at HBOS. Following last week's MPC minutes and a hawkish speech from King, markets are now pricing in an 84 pct probability of a rate hike next month, he added. Also supported by rising interest rate expectations meanwhile, the Swiss franc rose to a 17-day high against the dollar and a 12-day high against the euro. Hawkish comments from the central bank, as well as rises in the one-week repo rate, have sparked demand for the currency as the market contemplates the risk that interest rates will rise by 50 basis points rather than 25 at the next rate-setting meeting in September.