NEW YORK, March 3: The yen gathered momentum on Friday with anxious investors closely watching the Japanese currency, at the heart of this week's financial market turmoil.

The dollar fell to 116.79 yen at 2200 GMT, from 117.53 yen on Thursday.

The euro meanwhile rose to 1.3191 dollars from 1.3184 late in New York on Thursday. The European unit stood at 154.10 yen, down from 154.99 yen.

Analysts said the yen was seen as a key to this past week's stock market turmoil, because its low value and rock-bottom interest rates have made it source of borrowing by hedge funds and others looking for higher-yielding investments elsewhere. This is known in markets as the “carry trade.”If the yen keeps rising, this could force more traders to pay back their yen loans and possibly create further turbulence.

The yen is trading at an 11-week high in relation to the dollar on the basis of further 'carry trade' unwinding,” said Hilary Love at PNC Bank.

The yen is up 3.6 per cent this week versus the dollar, and stronger than expected Japanese economic data may mean rising interest rates that would negatively impact the economics of the “carry trade,” Love added.

John Kicklighter, currency analyst at Forex Capital Markets, said the dollar was “tossed around Friday as the currency yielded to carry trade flows that have wreaked havoc in the forex market for most of the week.”Kicklighter said the market has become more volatile in recent sessions, with traders forced to pay back yen loans. He said the dollar, which has benefitted from the carry trade, could face more pressure.

With a 5.25 per cent benchmark yield, the US dollar is easily labeled a high yielding currency, he said.

Furthermore, with the Federal Reserve's next move expected to be a cut later in the year, a broader move towards risk aversion could keep the dollar under pressure. Data out of Japan was mixed on Friday. Core inflation for January was in line with expectations, while the jobless rate for the same month improved slightly and household spending was well above expectations.

The US dollar gained ground against the euro earlier Friday after the Institute of Supply Management (ISM) said on Thursday that the US manufacturing sector had showed a surprisingly strong gain in February.

Commerzbank analyst Gavin Friend added: Overall, we expect the dollar to remain on the defensive, but given the data did not confirm the market's worst fears on growth, the recent bout of weakness should stabilize.

—AFP