NEW YORK (Bloomberg) — The yen rose from an almost three-month low against the dollar after China allowed its currency to strengthen at a faster pace and lifted interest rates to cool an overheating economy.The Japanese currency gained on prospects a stronger yuan will make exports from Japan more competitive against rival products from China. Rising interest rates reduced investors' appetite for risk, pushing them to exit bets against the yen.

"The yen tends to benefit since Japan has a close trade relationship with China," said Jens Nordvig, a senior currency strategist in New York at Goldman, Sachs & Co. "As interest rates rise in China, it pushed some unwinding of the yen shorts." A short is a bet on a currency's decline.

The Japanese currency rose 0.18 percent to 121.10 against the dollar at 4.34 p.m. on Friday in New York, rebounding from 121.39 earlier, the lowest since February 23. It also traded at 163.60 versus the euro from 163.70 yesterday, and reached a high of 162.62 earlier today following the China news. The yen dropped to a record low of 163.90 per euro on May 16.

The yen's advance on Friday was capped at a high of 120.70 per dollar as US stocks climbed and a report showed confidence among consumers unexpectedly increased in May. The Japanese currency also trimmed its gains as the market already discounted the China news, pushing some investors to book profit by selling the yen, taking advantage of its earlier rise, traders said.

For the week, the yen lost 0.75 percent against the dollar and 0.65 percent versus the euro as Japan's lowest interest rates among major economies spurred investors to buy higher-yielding currencies funded by loans in the Japanese currency, in a practice known as carry trades. The Bank of Japan kept its benchmark borrowing costs at 0.5 percent yesterday.

Canada's dollar rose to the highest level in almost 30 years against its US counterpart after a report showing a gain in retail sales added to signs of economic strength and boosted bets the Bank of Canada will raise borrowing costs this year.

The Canadian currency rose 0.9 percent to 91.72 US cents and earlier reached 91.94 US cents, the highest since October 10, 1977. It rose against all 16 major currencies tracked by Bloomberg on Friday.

The euro advanced against the dollar, snapping a two-day losing streak, on bets the European Central Bank will keep raising interest rates this year to contain inflation pressure, boosting the allure of European assets.

The ECB said in its monthly bulletin yesterday that "strong vigilance" is required to ensure inflation doesn't accelerate, signalling it will raise interest rates next month.

The ECB has lifted its benchmark interest rates seven times since November 2005 to 3.75 percent, while the Federal Reserve has held its benchmark at 5.25 percent since raising it to that level in June.

The euro strengthened 0.11 percent to $1.3509. It reached an all-time high of $1.3681 on April 27 and has gained 2.28 percent this year versus the dollar.

"The euro is still supported by the interest rate spread," said David Mozina, head of foreign-exchange strategy in New York at Lehman Brothers Inc. "The euro-dollar will probably push toward $1.38 in coming weeks."

Futures traders pushed up bets on the euro's gain against the US dollar to a record high last week, figures from the Washington-based Commodity Futures Trading Commission showed on Friday.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop — so-called net longs — rose 13.6 percent to 119,538 on May 15 from 105,270 a week earlier.

Asian currencies strengthened after the China news.