The dollar fell against the yen, posting its third consecutive annual drop, on expectations Japan will let its currency strengthen next year. The Bank of Japan refrained from selling...

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The dollar fell against the yen, posting its third consecutive annual drop, on expectations Japan will let its currency strengthen next year.

The Bank of Japan refrained from selling yen the past nine months, even as the currency rose to an almost five-year high, the government said yesterday. The dollar is also set for a third straight yearly loss versus the euro, as demand for U.S. assets waned and speculation increased that U.S. officials favor a weaker currency to help boost exports.

Japan “can’t help the dollar falling further against the yen,” said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank, a unit of Japan’s largest lender by assets. “Dollar-yen could pierce 100 next year, and we expect it to go to 98 in three months.”

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The dollar declined to 102.63 yen yesterday and reached its lowest since Dec. 6, according to electronic currency-trading system EBS, from 103.07 Thursday. The euro weakened to $1.3554, from $1.3636 Thursday, when it reached a high of $1.3666. The dollar lost 7.1 percent this year against the euro and 4.3 percent versus the yen.

Month-end buying by investors in New York trading helped boost the dollar against the euro, said strategists including T.J. Marta at RBC Capital Markets in New York.

The Bank of Japan, which acts for Japan’s government in the currency market, will keep the dollar above 100 yen, said Daniel Katzive, a currency strategist in Stamford, Conn., at UBS Securities. UBS predicts a dollar-yen rate of 105 a year from now.

Japanese Finance Minister Sadakazu Tanigaki on Tuesday said Japan “will closely watch the exchange rate” during the holidays, sending the yen to its biggest loss in three weeks the following day. Bond and stock markets in Tokyo closed for the year yesterday and remain shut until Jan. 4.

Japan stayed out of the currency market in the month to Tuesday, a period when the yen reached as strong as 101.83 a dollar Dec. 2, the highest since January 2000. In a bid to stem the pace of the yen’s advance, the Bank of Japan sold a record 14.8 trillion yen ($144.2 billion) in the first three months of 2004, Ministry of Finance figures show.

Against the euro, “$1.40 is probably the next target we’re looking to hit,” said Adam Cole, a currency strategist in London at RBC Capital Markets.

The dollar also retreated this year against more than a dozen other major currencies, including the British pound, Swiss franc and Canadian dollar. Among all currencies, the Polish zloty rose the most, by about 24 percent.

With a third straight year of declines, the Federal Reserve’s Trade-Weighted Major Currency Dollar Index posted its longest losing streak since Ronald Reagan was president. The index lost 6.4 percent this year after dropping 15 percent in 2003 and 9.3 percent in 2002.

Speculation foreign demand for U.S. assets is waning contributed to the dollar’s slide in the second half of the year, said Marvin Barth, a global currency economist at Citigroup in London and a former Fed employee.