The yen climbed by the most in almost a month against the euro after Moody's said Japanese banks have avoided the worst of the credit crisis. The currency also advanced as a decline in European and Asian stocks reduced demand for higher-yielding assets funded in Japan. The euro traded near a three-week high against the dollar as a European Union report showed inflation in the region was higher than expected in June.
The yen advanced as much as 0.9 percent, the most since June 2, and was at 166.30 against the euro by 7:06 a.m. in New York, from 167.58 on June 27 and 157.40 on March 31. Against the dollar, it was at 105.45, from 106.13 at the end of last week and 99.69 last quarter. The dollar slipped to as low as $1.5836 per euro, the weakest since June 9, and was at $1.5771 from $1.5794.
Japan had its rating raised one level to Aa3 by Moody's, which said the government will keep trying to restrain spending to shrink debt. Japanese Prime Minister Yasuo Fukuda last week reaffirmed his pledge to balance the budget by 2011 so that the government can cut the world's largest public debt.
The yen gained to 101.63 per Australian dollar, from 101.99 at the end of last week, and to 210.08 against the British pound from 211.73. The Aussie, as Australia's currency is known, climbed to as high as 96.68 U.S. cents, the highest since February 1983, and was at 96.34 cents from 96.10 cents.
The yen also strengthened after the Nikkei 225 dropped 0.5 percent and Europe's Stoxx 600 fell 0.3 percent, prompting investors to reduce purchases of higher-yielding assets.
In carry trades, investors get funds in a country with low borrowing costs and purchase assets where returns are higher. Japan's target lending rate of 0.5 percent, is the lowest among industrialized countries.
Gains in the yen may be limited by speculation the Bank of Japan will keep interest rates on hold, while the European Central Bank prepares to raise borrowing costs.
Japan's central bank will keep its target lending rate at 0.5 percent through September 2009, a Bloomberg survey showed. Benchmark rates are 7.25 percent in Australia and 12.25 percent in Brazil.