The yen weakened back towards 113.30 on Thursday, but the US dollar was unable to sustain the gains and weakened to lows around 112.25. For the second day running, a sharp drop on Wall Street strengthened the yen before US stocks rallied in late trading which pulled the dollar off lows.

The US currency held above the important 112.0 technical support region in Asia on Friday despite a further fall in Asian stock markets. Dollar confidence remained weak and the yen strengthened further to highs near 111.0 after the 112.0 level broke in Europe. The yen gained support from a renewed increase in risk aversion on rumours of further debt write-downs in the global banking sector.

The Chinese yuan continued to strengthen on Friday as the central bank tolerated further gains. There was increased speculation that the Chinese authorities would increase interest rates and allow a faster pace of yuan revaluation. Chinese speculation will help underpin the Japanese currency.

There will be some speculation that the Japanese Finance Ministry is encouraging institutional yen selling near recent dollar lows with the government looking to maintain a firm competitive position to support the industrial sector.