Yen Extends Rally To 7-Month High Vs Dollar

NEW YORK (Dow Jones)--The yen extended its recent rally Friday, marking a fresh seven-month high against the dollar.

The yen also advanced to a one-week high against the euro, as it broke closely watched levels against the dollar that drove traders to buy Japan's unit.

The next level eyed for the dollar is Y89.80, a break of which could send the dollar tumbling again.

"We continue to view the yen as likely to surprise," said analysts at Credit Suisse.

They forecast that a recovery in global production will support Japan's exporter revenue and increase foreign demand for Japanese equities. In addition, interest rates for major currency rivals are "too low" to attract local investors out of Japan.

Friday afternoon in New York, the euro was at $1.4582 from $1.4584 late Thursday, according to EBS via CQG. The dollar was at Y90.64 from Y91.70. The euro was at Y132.21 from Y133.73.

UBS said the Bank of Japan may have to tackle the issue of a strong yen at its policy meeting next week.

Meanwhile, the U.K. pound was at $1.6677 from $1.6658, while the dollar was at CHF1.0372 from CHF1.0385.

The dollar has been broadly weaker, sold on dropping long-term U.S. interest rates, which signal the market expects the Federal Reserve to keep the yield on the U.S. currency at very low levels well into next year.

Data from the British Bankers' Association showed three-month dollar Libor, an important gauge of the effectiveness of the Fed's monetary policy, slipped to 0.299% from Thursday's 0.29969%, albeit above the record low of 0.29869% seen Wednesday.

"The move has been so rapid," said Hidetoshi Yanagihara, a currency strategist at Mizuho Corporate Bank in New York. "Rates are coming off much faster than the market thought," he said, leading traders to sell the dollar.

The mid-point for Japan's fiscal year may also be leading to some repatriation into the yen, said analysts.

While the euro advanced to a fresh nine-month high of $1.4636 Friday, intraday volatility in equities and crude-oil markets, as well as profit-taking and the expiration of options contracts, undercut those gains.

Positive U.S. data also provided some momentary support for the U.S. unit.

The Reuters/University of Michigan preliminary consumer sentiment index for September gained to 70.2 from 65.7 in August, compared with economist expectations for a reading of 67.5.

But Barclays Capital and other institutions believe the dollar has further to fall in the near term.

Currency positioning among private and official investors isn't yet at extreme levels that they would require a bounce back, according to Barclays.