NEW YORK The yen recovered slightly on Friday but posted its worst weekly performance against the dollar since mid-February as expectations of aggressive monetary easing from the Bank of Japan diminished the currency's appeal.
The euro, meanwhile, continued to struggle on persistent concerns about Greece's fiscal problems and Europe's stagnant economy.
The dollar, up about 2.2 percent versus the yen on the week, remained in favor after Japanese Prime Minister Yoshihiko Noda paved the way for a snap election on December 16. The lower house of parliament was dissolved on Friday.
Shinzo Abe, leader of the main opposition Liberal Democratic Party and seen as likely to be Japan's next leader, called on Thursday for the country's central bank to adopt interest rates of zero or below to spur lending.
"The chaos with respect to Japan's snap election and the lack of confidence in the government does not bode well for dollar/yen," said Andres Bergero, vice president and chief corporate trader at Bank of the West in San Ramon, California.
"But Japan, because it is resilient, will continue to endeavor to move forward and they will get their house in order."
The dollar rose as high as 81.44 yen, just shy of the 7-1/2-month peak hit on Thursday. It last traded at 81.26, up 0.2 percent on the day, according to Reuters data.
Traders cited a large options barrier at 81.50 yen and stop-loss orders placed above it.
Analysts also believe the dollar could rise toward 82 yen if the Bank of Japan, which holds a policy meeting next week, indicates it could ease further.
Price action, however, was subdued compared with Wednesday and Thursday, when the dollar rallied about 1.1 percent each day.
"We have had quite a big move in the last couple of days so we've probably seen the bulk of the early moves. The direction will continue trending higher in coming months," said Colin Asher, senior economist at Mizuho Corporate Bank.
"Some investors with short-term horizons are probably looking to take profits after such big moves and some of the longer-term investors are happy to sit on their positions on the expectations that the rise will continue."
The yen, seen as a safe haven in times of uncertainty, could pare losses should concerns about the U.S. "fiscal cliff" mount and euro zone debt concerns deepen. But the dollar should also benefit due to its safe-haven status.
If Congress and the White House cannot reach a debt and deficit reduction deal by the end of the year it will unleash massive spending cuts and tax increases that some believe have the potential to tip the U.S. economy back into recession.
Congressional leaders said a meeting with President Obama on Friday about the "fiscal cliff" was constructive.
Against the dollar, the euro fell for the first time in three sessions, last trading down 0.3 percent at $1.2740 but holding above Tuesday's two-month low of $1.2660.
At current prices the euro was flat on the week, but down 1.9 percent so far in November.
A dispute among Greece's international lenders and weak economic data out of the euro zone have done little to lift market sentiment toward the euro.
Any new reduction of Greece's debt should only come as a reward for Athens implementing the reforms it has agreed to, European Central Bank Governing Council member Jens Weidmann said on Friday.
The euro is expected to rally if word emerges that Spain is requesting aid because it will set the stage for the European Central Bank to start buying the country's bonds to lower its borrowing costs.
The euro last traded down 0.4 percent at 103.36 yen.
"The euro's decline today underscored how underlying sentiment remained decidedly bearish after official figures this week confirmed a return to recession for the broader euro economy," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
"The region's seemingly endless debt crisis should keep a low ceiling above the euro for the foreseeable future."
(Editing by James Dalgleish)