LONDON (Reuters) - The euro hit a six-week high against the Japanese yen on Friday after comments from German Chancellor Angela Merkel the previous day strengthened expectations that action will be taken to stem Europe's debt crisis.
The dollar also rose to a five-week high against the yen, buoyed by a recent rise in U.S. government bond yields in the wake of firmer economic data and as a greater appetite for riskier assets hurt the safe-haven Japanese currency.
Merkel said on Thursday that last month's declaration by European Central Bank President Mario Draghi that he would do whatever it takes to preserve the euro were "completely in line" with the approach taken by European leaders.
Her comments soothed market worries about disagreements among euro zone leaders on how to tackle the crisis and increased expectations the ECB would buy Spanish and Italian bonds next month to lower the two countries' borrowing costs.
The euro rose 0.1 percent to 98.263 yen on the EBS trading platform, its strongest since early July, extending gains after it broke above its 55-day moving average of 97.997.
The single currency held steady at $1.2352, having earlier risen to $1.2375, above Thursday's high.
Further gains could take it towards last Monday's peak of $1.2444. However, analysts said concerns about the euro zone debt crisis and a weakening economy were likely to make investors wary of pushing the euro out of its recent trading range.
"The Merkel comments were supportive for the euro in that they were consistent with the ECB, though this was tempered by the fact that the main opposition to bond-buying comes from the Bundesbank (Germany's central bank) not the government," said Adam Cole, global head of currency strategy at RBC in London.
A Reuters poll on Thursday showed economists expect the ECB to begin buying bonds of Italy and Spain in September, and to cut its main refinancing rate to a record low of 0.5 percent.
DOLLAR GAINS VERSUS YEN
The dollar rose 0.1 percent to 79.463 yen, its strongest since mid-July. Traders said it could extend gains if it breaks above stop-loss buy orders at 79.50, potentially targeting its 100-day moving average at around 79.65 yen.
Surprisingly strong U.S. retail sales figures earlier this week and other firmer data since have dampened expectations the Fed will launch another round of bond-buying, or quantitative easing, as early as September, and lifted U.S. Treasury yields.
The strong relationship between the performance of the dollar against the yen and yield spreads between U.S. and Japanese government bonds could see the dollar add to its gains if U.S. yields rise further.
But analysts warned the U.S. economic recovery remained shaky and this would limit the scope for gains in bond yields.
"U.S. long-term rates have risen, so it's hard to imagine the dollar weakening from here," said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo.
The dollar index , which measures the dollar against a basket of currencies, rose 0.1 percent to 82.457, though it stayed below a two-week high of 82.881 set on Thursday.
The Australian dollar slid against the U.S. dollar and the euro as traders trimmed long positions in the high-yielding currency, concerned that its recent rise may have been overdone. It was last down 0.7 percent at US$1.0443.
"There is a growing body of opinion that the Australian dollar's overvaluation is much more of an issue domestically than it was previously," said RBC's Cole.
