The yen weakened on Friday as hopes of a US government programme to subsidise mortgages boosted world stock markets, while data showing the deepest ever economic contraction in the eurozone hit the euro.
Sterling also rallied as investors squared market positions ahead of the weekend on concerns that Group of Seven finance chiefs may discuss the currency's recent weakness, even though they're keen to avoid upsetting troubled financial markets with squabbles over exchange rates.
The euro fell around a cent from intraday highs to below $1.2850 after the eurozone recession data boosted pressure for the European Central Bank to cut interest rates by half a percentage point next month to a record low 1.5 percent.
"The fall in euro area GDP is unprecedented," said Jurgen Michels, European economist at Citigroup in London. By 1300 GMT the euro was down 0.2 percent on the day at $1.2837, having earlier hit a high of $1.2942. It was down almost 2 percent against the British pound at 88.45 pence and was also down against the Swiss franc and Swedish crown.
The euro rose against the yen, however, up 0.75 percent to at 117.70 yen, and the dollar rose 0.9 percent to 91.67 yen, according to Reuters data. The dollar and yen, which often show an inverse correlation to investors' risk appetite, lost ground to higher-yielding currencies as global equities recovered ahead of the G7 meeting in Rome and a long weekend in the United States.
Markets welcomed the news that the Obama administration may unveil a broad plan to put a floor under the housing market. A rising wave of US mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the world.
Attention now turns to the G7 meeting in Rome. Analysts will be looking to see how much sterling's recent slide on world currency markets features in discussions. Analysts said the bleak euro zone GDP figures had also raised concerns that G7 leaders may discuss the pound's recent weakness against the euro.
Sterling rallied off one week lows hit on Thursday, gaining 1.9 percent against the dollar at $1.4527. Looking forward, the increasing premium demanded for insuring UK and US government debt posed downside risks for the dollar and sterling, ING FX strategist Tom Levinson said.
Credit rating agency Moody's Investors Services said late on Thursday that the triple-A credit ratings of both the US and Britain are "being tested" by the strains facing the global economy, while countries such as France and Germany are proving more resistant.