LONDON (Reuters) - The euro extended gains on Thursday, hitting its highest since late April against the yen on expectations international lenders will soon agree an aid deal for Greece and Japan would ease monetary policy further.
The single currency also rose to a three-week high against the dollar helped by euro zone data which showed manufacturing activity slowed less than expected in November.
The PMI data marginally eased worries about a deepening euro zone recession, especially after an earlier survey revealed manufacturing in China expanded for the first time in 13 months. But gains looked fragile as the euro zone economy was likely to struggle in coming months, keeping alive chances of further interest rate cuts by the European Central Bank.
The euro rose 0.4 percent to 106.35 yen, having risen to 106.585 yen earlier. More gains could see it target resistance at the 100-week moving average around 106.69 yen.
The single currency rose 0.4 percent on the day to $1.28845 according to EBS data, its highest since early November. Traders cited steady buying by U.S. investors with sentiment helped by lower yields on Greek and Spanish bonds.
German Chancellor Angela Merkel said on Wednesday an agreement to release aid to Athens was still possible next Monday, helping the euro recover after Greece's international lenders had earlier failed to reach a deal.
"The driving factors behind euro/dollar are the global macroeconomic backdrop seems to be improving and people are pricing out the tail risk on Greece... There is less concern about whether a deal on Greece will eventually be struck," said Arne Lohmann Rasmussen, head of currency research at Danske Bank.
He said this was encouraging investors to square recent short positions in the euro and other riskier currencies before the long weekend in the United States. Volumes would be thin, however, due to the U.S. Thanksgiving holiday on Thursday.
Danske's Rasmussen added that expectations of more monetary easing in Japan would encourage yen-funded carry trades, in which investors borrow in low-yielding currencies like the yen in order to investor in higher-yielding assets.
The dollar has climbed around 4 percent against the yen in the last seven trading sessions, with the Japanese currency weakened by market expectations that the country's next government could push the Bank of Japan to implement more drastic monetary stimulus.
The dollar rose to 82.84 yen, its highest since early April. The yen also hit a 7-1/2 month low versus the higher-yielding Australian dollar and against sterling.
Shinzo Abe, the leader of Japan's opposition Liberal Democratic Party, which holds a commanding lead in opinion polls before an election on December 16, has called for "unlimited" easing until 2 or 3 percent inflation is achieved, as well as pushing short-term interest rates to zero or below.
Analysts say yen weakness could persist until the election next month.
"We think the yen will continue to weaken against the dollar related to elections on December 16 when the BOJ is expected to be more aggressive in its easing...but the move has been a bit too fast," said Marcus Hettinger, Global FX Strategist at Credit Suisse.
He added the bank's target for the euro is to reach 108 yen in three months' time. But he said he expects a target of 80 for dollar/yen, largely from dollar weakness in 2013 as the Federal Reserve considers more monetary easing.
But optimism on the U.S. budget front has grown after leading legislators recently expressed confidence that they could reach a deal to avert the so-called fiscal cliff of spending cuts and tax hikes due to take effect in early 2013.
Additional reporting by Jessica Mortimer, editing by