The Yen advanced on Thursday, buoyed by the view that the US economy has yet to see the worst of the sub-prime mortgage crisis after investment bank Bear Stearns reported its first-ever quarterly loss.

An unexpected fall in a US Mid-Atlantic manufacturing activity index also weighed on the market already pressured by a persistent credit crunch. That prompted investors to avoid risky carry trades where they buy the yen and sell higher-yielding currencies.

Concerns that the credit fallout was spreading to other market segments mounted late Wednesday, with Standard & Poor's revising its outlook downward for major bond insurers Ambac Financial Group, MBIA Insurance Corp and XL Capital Assurance. Yesterday, MBIA, the world's largest bond insurer, said it had exposure to $30.6 billion in complex mortgage securities that it ensures, an amount that exceeds its entire net worth.

UsdJpy fell 0.11% to 113.18 and EurJpy dropped 0.47% to 161.18. The Yen briefly extended gains against the dollar earlier after the Philadelphia Federal Reserve's index of regional manufacturing fell sharply to its lowest since April 2003. But gains in the Yen kicked off after Bear Stearns reported the first quarterly loss in the company's history of $854 million, and took a write-down of $1.9 billion in the quarter ended November. In addition, Bank of Japan left interest rates on hold. Meanwhile, EurUsd slipped 0.35% to 1.4331, hurt by continued position adjustment and some repatriation of funds as the year winds down. GbpUsd hit four-month low, having broken below the key 2.0000 mark the previous session after minutes from a Bank of England meeting suggested it may cut rates again as soon as January. In contrast, expectations of Federal Reserve rate cuts next year have been slightly scaled down in the wake of last week's unexpectedly strong US economic data. GbpUsd fell to a four-month low of 1.9810 and was last trading at 1.9837, down 0.62%. EurGbp rose 0.28% to 0.7225 close to a 4-1/2-year high 0.7257.

Today, Forex market will focus on the release of the Fed's favored gauge of inflation, the core personal consumption expenditures.