* Dlr gains, hits highest vs yen since September 8
* Price action subdued, Japan on last trading day of 2009
* Fiscal worries weigh on yen
* U.S. Chicago PMI data adds to recovery view
(Recasts, adds quote, updates prices)
NEW YORK, Dec 30 (Reuters) - The dollar gained across the board on Wednesday, hitting its highest since early September against the yen, on year-end flows in thin trade and views the U.S. economy is on the road to recovery.
Concerns about Japanese fiscal health also weighed on the yen after rating agency Standard & Poor's said Japan's credit rating could be in danger if policy initiatives fail to stabilise and gradually reduce the country's debt burden. [ID:nTOE5BT03A]
Market activity was extremely subdued ahead of the new year, however, with Japanese markets closed on Thursday and European and U.S. markets closed on Friday.
A report showing U.S. Midwest business activity expanded far more than expected in December helped reinforce views that the U.S. economy is on the mend, analysts said.
"The dollar is gaining some traction and extending gains from yesterday," said Kathy Lien, director of currency research at GFT Forex in New York.
Midway through the New York session, the dollar had reached
a high of 92.77 yen according to Reuters data, its highest
since September 8. It was last at 92.63 yen
The dollar also touched the highest against the yen since
September 8 on electronic trading platform EBS
The dollar's gains on Wednesday pushed it to a 2.2 percent advance against the yen for 2009.
"People are starting to get increasingly worried about Japan's fiscal situation," Bank of New York Mellon currency strategist Neil Mellor said in London.
Fiscal issues will be the big story at the start of 2010, especially in Japan and the UK," Mellor said.
The euro was last down 0.4 percent against the dollar to
$1.4296
Earlier in the global session, ongoing concerns about how
the UK will fund its ballooning fiscal deficit helped push
sterling to a two-and-a-half month low against the dollar
But the pound later recovered and was last up 0.8 percent at $1.6030. Analysts cautioned the move was driven by end-of-year flows and holiday-thinned trading volumes. [ID:nLDE5BT141].
RATE OUTLOOK
Improved U.S. data in the past month has made many review their forecasts for when rates might start to rise and has brought the dollar up from a 14-year low against the yen and revived its fortunes against other majors.
When the Federal Reserve will start to raise rates will be a key question for the currency market in 2010, with investors watching policymaker comments closely, as well as what data indicates about the strength of the labour market.
The December non-farm payrolls report is due on Jan. 8 and some economists are expecting the data to turn positive in the first quarter, after the number of jobs lost shrunk to 11,000 in November.
While the market is looking to the timing of Fed tightening, the Bank of Japan is expected to keep interest rates low and may implement further easing measures. [BOJ/INT]
Traders said once the market gets a stronger sense of timing for the U.S. exit strategy, the yen might become the preferred currency to fund purchases in higher yielding assets.
In the only U.S. data of note, The Institute for Supply Management-Chicago business barometer rose to 60.0 from 56.1 in November. That was much better than economists' forecast of 55.0, which was the median in a Reuters poll that ranged from 52.0 to 58.0. [ID:nN30215152].
"The momentum in the greenback was further fueled by the much stronger than expected Chicago PMI report," said GFT's Lien in a note to clients after the report's release. (Additional reporting by Jessica Mortimer in London) (Reporting by Nick Olivari)