The yen and the dollar fell on Friday as world stock markets rose on hopes for a U.S. government program to subsidize mortgages and as investors readied for a Group of Seven finance officials' meeting.
The British pound also rallied as investors squared market positions ahead of the weekend on concerns that G7 leaders may discuss the currency's weakness, even though finance ministers and central bankers are keen to avoid upsetting troubled financial markets with squabbles over exchange rates.
The dollar and the yen, which often show an inverse correlation to investors' risk appetite, lost ground to the euro and higher-yielding currencies as global equities rose ahead of the G7 meeting and a long weekend in the U.S.
"It's a risk-on day," said State Street FX strategist Lee Ferridge.
"Not that people are expecting a great deal from the G7 but there's that lingering thought they might come out with something substantial. They want to position in case there's a surprise out of G7 and that surprise would be that they come out with something significant."
European shares .FTEU3 were up roughly 2.0 percent, buoyed by the latest U.S. plan which, in a major break from existing aid programs, would seek to help homeowners before they fall into arrears, sources familiar with the plan told Reuters
A rising wave of U.S. mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the world.
By 1118 GMT the dollar had risen 0.7 percent to 91.51 yen, while the euro was little changed at $1.2868, having climbed as $1.2942, according to Reuters data. The single European currency rose 0.8 percent to 117.76 yen.
The euro also came under pressure against the pound however after the latest batch of weak economic data from the 16-nation bloc that could hasten European Central Bank interest rate cuts.
Sterling rallied off 1 week lows hit on Thursday, up 1.8 percent against the dollar at $1.4522. The euro fell 1.8 percent to 88.58 pence.
The euro zone economy saw its deepest contraction on record in the fourth quarter of 2008, data showed, hit by a record weak performance in Germany as well as deeper-than-expected falls in output in France and Italy.
Analysts said that the worse-than-expected reading from the euro zone had raised concerns that G7 leaders may discuss the pound's recent weakness against the euro.
"There's a mixture of the poor GDP data and some short-covering ahead of G7 in the sense that the bad set of euro zone data might put the UK authorities under pressure at G7 to do something about the weaker pound," said Investec chief economist Philip Shaw.
French Economy Minister Christine Lagarde last month called for Britain to do something about its currency as France worried that its businesses will lose out to cheaper British goods and services just when recession is spreading across the industrialized world.
The Australian dollar meanwhile, got an extra boost to trade up over 1.3 percent against the U.S. dollar after a last minute deal helped push a stimulus package through Australia's parliament.
