Dollar up versus yen

The US dollar posted its largest daily gain in almost two months against the euro on Friday, after traders said the greenback's slump earlier this week may have been overdone. Against the yen, the dollar gained ground after the US government said it will provide loans to Detroit carmakers crippled by the economic downturn.
The Bank of Japan's interest rate cut to nearly zero also lent support to the greenback. "We've seen an extraordinary amount of volatility over the last few sessions and part of that is due to the fact that it's year-end and month-end for a lot of banks and institutions," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto. "It really is about flows and positioning."
The euro also lost ground after the European Central Bank said on Thursday it would reduce the return it offers to those banks that hold cash with it, eroding the appeal of the euro-zone currency. "What this ECB move did was, for all intents and purposes, it knocked down the euro's interest rate advantage versus the US So it made it less attractive to hold euros," said Ronald Simpson, managing director of global currency analysis at Action Economics, in Tampa, Florida.
In midday trading in New York, the euro was down 2.7 percent at $1.3855 after hitting a low of $1.3839, according to Reuters data. The euro hit $1.4720 on electronic trading platform EBS on Thursday, its strongest since late September. Despite Friday's pullback, the euro is on track post a weekly gain of nearly 4 percent against the dollar.
The euro fell 2.9 percent to 124.07 yen. Analysts said once the year-end flows are out of the way and investors return to their allocation for the coming year, the worsening economic backdrop in the eurozone should come back to weigh on the region's currency.
"We believe that the euro will become increasingly vulnerable in the New Year," currency strategists at BNP Paribas wrote in a research note. "We expect the eurozone economy to deteriorate far more rapidly than the market is currently anticipating, exposing the ECB as being way behind the curve."
AUTO AID: The dollar also found support from news that the US government will offer up to $17.4 billion in loans to the ailing US automakers and expects General Motors and Chrysler LLC to access the money immediately. The dollar last traded up 0.3 percent at 89.61 yen.
Adding to gains in the dollar was a decision by the Bank of Japan on Friday cut interest rates to 0.1 percent, taking the policy target rates of Japan and the United States to more or less equal footing.
"The notional change in Japan's 'call rate' has made the Fed's move to a (zero) to 0.25 percent target range look less severe and the sell off that we saw in dollars post the (Federal Reserve's) decision on Tuesday is now somewhat reversing course," said Dustin Reid, senior currency strategist at RBS Global Banking $Markets in Chicago.
The yen had surged in recent sessions, climbing to its strongest level in more than 13 years earlier this week, as concerns about the global economy prompted more investors to dump risky positions funded by cheap borrowing in the Japanese currency.
In a sign that the global credit crunch may be easing, central banks around the world announced their latest effort to pump cash into the financial system on Friday but noted overall demand for US dollars has declined.