By Patrick Graham

By Patrick Graham


LONDON (Reuters) - The dollar was close to an eight-week low against the yen on Friday as escalating tension over North Korea dominated currency markets thinned out by the summer holidays in Europe and the United States.


The yen gained around 0.2 percent in Asian time as investors took their money out of higher-yielding currency plays following another warning from President Donald Trump to Pyongyang.


It had retreated to trade almost flat on the day at 109.17 yen per dollar by 0711 GMT but was still 0.2 percent stronger against the euro at 128.28 yen. The dollar index, which measures its strength against a basket of currencies, gained 0.1 percent to 93.490.


"More likely than anything else, the price action was a


function of an overextended US equity market that has been in need for a healthy correction off record highs," LMAX Exchange analysts said in a morning note.

"The direction in global equities will likely play a major role in the Yen’s direction today, while the market will also be interested to see what comes of US CPI data."

Morgan Stanley analysts raised their forecasts for the euro in a note sent to clients late on Thursday, predicting the single currency would rise to $1.25 in the first quarter of next year and reach parity with sterling for the first time.

The U.S. bank argued that Switzerland's asset management industry, which has held huge inflows in francs since the euro zone's debt crisis took hold in 2010, would finally begin to reduce its franc position in the months ahead.

"With (the euro zone's) political and economic outlook looking better, Swiss accounts could emerge as a main euro buyer, pushing the euro up across the board," they said.

The attraction of the franc in the face of the Korean situation, however, has pulled it back from long-term lows hit earlier this month.

The euro, which hit its highest since the start of 2015 on Aug. 2, dipped 0.2 percent to $1.1753 in early trade in Europe.

It was 0.2 percent lower at 1.1310 francs, compared with highs of 1.1537 francs hit a week ago.

(Reporting by Patrick Graham, editing by Larry King)