The yen enjoyed a brief rebound in Asia after the release of stronger-than-expected Japanese industrial sector data but backtracked during European trading as traders bet it would be some time before Japanese domestic demand gathered momentum. Even steep declines in US stocks suffered on Friday failed to dent demand to buy dollars for yen as optimism persisted that that the US Federal Reserve would engineer a soft-landing for the world's largest economy.

"Japanese investors seem to be more inclined to sell (dollar/yen) but people outside Japan seem to think that the economy still has a long way to go," said Alfonso Prat-Gay, global head of foreign exchange strategy at JP Morgan. He said the dollar had the potential to extend its gains beyond the five-month high of 111.26 yen it set on Friday by at least a yen.

The dollar was at 111.16/18 yen at 1058 GMT, up from the 110.42 low set in Asia after the ministry of international trade and industry's all-industries index, a closely watched measure of Japan's economy growth, beat analysts' expectations and rose by 0.3 per cent in December. Euro/yen rose as far as 109.85, its strongest since November 1999. Last week's warning by international ratings agency Moody's Investors Service that it may downgrade Japan's credit rating was one of factors which propelled the dollar above 110 yen last week and remained a background negative for the yen. Analysts said speculation that Japanese Prime Minister Keizo Obuchi could call an early election was creating some political uncertainty and providing traders with another excuse to sell yen. By contrast, the dollar proved resilient to bad news,holding firm despite losses of about three per cent racked up on Friday by both the Dow Jones Industrials Average and the technology-weighted Nasdaq Composite Index.

The Dow is now down about 13 per cent from its mid-January highs, although the Nasdaq closed at record highs as recently as Thursday.

"I'm absolutely amazed by the resilience of the dollar to maintain a neutral to positive bias while the Dow is losing some three per cent," said Gilles Borrel, head of global treasury sales at West Deutsche Landesbank in Paris.