By Ellie Ismailidou, MarketWatch , Hiroyuki Kachi

Yen weakens as its 'haven status' dissipates

The dollar extended gains Friday after Federal Reserve Chairwoman Janet Yellen said an interest-rate increase may be coming in a matter of "months," if the economy continues to improve.

Her comments boosted the greenback, which had already been flirting with a two-month high against the euro after fresh data showed the U.S. economy grew in the first quarter at a faster pace than initially estimated.

Though the strong gross-domestic-product data had fueled speculation that the Fed might raise rates soon, Yellen's comments still surprised some market-watchers who thought she would likely wait until a June 6 speech to crank up the rate-specific rhetoric.

"In sum, this is the same message that we've seen ad nauseam from a host of Fed speakers over the past couple of weeks. but she's the Chair!" said Thomas Simons, senior money-market economist at Jefferies, in emailed comments.

The ICE U.S. Dollar index , a measure of the dollar's strength against a basket of six rivals, was up 0.6% at 95.75, its highest level since March 28.

The euro fell to $1.1115 late Friday, from $1.1195 late Thursday in New York, its lowest level since March 28. Meanwhile the pound fell to $1.4613 from $1.4662 late Thursday.

Read:Janet Yellen says a rate rise in coming months is probably appropriate (http://blogs.marketwatch.com/capitolreport/2016/05/27/live-blog-and-video-of-janet-yellen-interview/)

The dollar also rose against the yen Friday. But analysts mainly attributed the moves to a reversal of the risk-averse sentiment that had fueled demand for the yen as a haven currency earlier this year.

"Market talk of uncertainty" has dissipated as oil prices have stabilized, equity markets have been pushing higher and economic data in the U.S. have been improving, said Juan Perez, a currency trader at Tempus Inc.

As a result, the yen's haven status has been challenged, while at the same time Japan's economy remains under deflationary pressures--both of which weighed on the yen Friday, according to Perez.

Late Friday, the dollar was changing hands at Yen110.33, compared with Yen109.75 late Thursday in New York.

Breaking above Yen110.00 is a critical level for the greenback, according to Shinichiro Kadota, vice president of research at Barclays in Tokyo, as during recent sessions the dollar was caught in a pattern where "it struggles to go up after breaking above Yen110.00, but shows a rebound when it falls below Yen109.50."

On the U.S. economic front, the stronger-than-expected data on gross domestic product (http://www.marketwatch.com/story/first-quarter-us-gdp-raised-to-08-2016-05-27) were viewed as enhancing expectations that the Fed might raise interest rates sooner than later, pushing the dollar higher.

Gross domestic product rose at an 0.8% annualized rate in the first quarter, up from an initial 0.5% reading, the Commerce Department said. Somewhat stronger home building and restocking of warehouse shelves were behind the upward revision.

Earlier in the day, currency market participants largely played down the statement of the Group of Seven summit that volatile foreign exchange moves may have an adverse economic impact. After wrapping up their two-day meeting in western Japan, the leaders also reaffirmed that monetary easing should not be used for competitive currency devaluation.

Meanwhile, expectations are high for Japan to put together a fresh stimulus package. Prime Minister Shinzo Abe, who hosted the G-7 summit, on Thursday offered a grimmer picture of the world's economy, warning of the risk of an economic "crisis." (http://www.marketwatch.com/story/are-commodities-signaling-a-lehman-sized-meltdown-japans-abe-thinks-so-2016-05-26)

(END) Dow Jones Newswires

May 27, 2016 16:07 ET (20:07 GMT)