Although Japan's fiscal troubles are well known, analysts said the downgrade called into question the yen's status as a safe-haven currency, boosting the appeal of the dollar and the likes of the Swiss franc.

S&P, in downgrading Japan to a rating of AA-minus, said the country's government lacked a coherent plan to tackle its mounting debt.

So far, analysts say Japan's situation is unlike that of other nations, though at the very least it has raised questions and sharpened the risk focus of sovereign wealth funds and other investors that might view the yen as a safe-haven currency.

The dollar was up 0.7 percent at 82.90 yen after rising more than 1 percent to 83.22 on electronic trading platform EBS.

The US budget deficit is expected to blow out to a record $1.5 trillion this year, and debt worries in Europe have already spurred financial rescues of Greece and Ireland.

"It is reasonable to expect that the Japanese downgrade will raise concerns over the sovereign rating of the US," said Vasileios Gkionakis, macro strategist at Fulcrum Asset Management LLP in London, which oversees $900 million in assets.

Gkionakis, however, downplayed the risks to at least the United States, pointing out that US gross domestic product is forecast to accelerate while Japan's will likely moderate. In addition, Japan's debt-to-GDP ratio is twice as high as that of the United States.

And though deficits in both countries are large, the United States's is expected to improve more than Japan's, Gkionakis said.

"It's definitely a yen story," said William Reekstin, managing director with Direct Access Partners in New York. "Japan had been on the watch list for a long time so it was expected. It's not the case for the US"

Still, analysts said the euro may be better placed to gain against the yen than the dollar, given its better interest rate outlook and concerns about the debt problems in the United States.

Against the yen, the euro rose to 114.02 yen, its strongest since Nov. 22, up around 1 percent on the day.

Other currencies may also be better placed, particularly the Swiss franc, which may now be the favored safe-haven currency. It hit a high around 88.13 yen, its strongest since last April.

EURO ACTION

The euro was also boosted on Thursday by remarks by a European Central Bank policy maker, Lorenzo Bini Smaghi, who warned that an expected rise in imported goods inflation cannot be ignored, supporting the view that euro zone rates could rise sooner than later.

The comments helped the euro extend gains a day after the Federal Reserve in a policy statement gave no indication that the US central bank may back away from its loose monetary policy, contrasting with the hawkish ECB rhetoric.

"The ECB has started to show more concern about secondary price pressures, and the market has acknowledged that," said Gavin Friend, currency strategist at nabCapital.

The euro rose to $1.3760 on EBS, its strongest since Nov. 22, keeping intact a strong uptrend from a four-month low below $1.29 hit earlier in the month. It later eased to $1.3729, up 0.1 percent on the day.

The euro pierced resistance around $1.3740, the 61.8 percent retracement of its two-month decline until early January. Technical analysts said a daily close above that would add to the positive tone. The next target is the Nov. 22 high of $1.3786, and some analysts say a break of this could prompt more gains towards $1.40.?Reuters