Oct. 6 (Bloomberg) -- The yen snapped a two-day winning streak after a Japanese official said North Korea may test a nuclear weapon in coming days.

Japan's currency fell against 15 of the 16 most actively- traded currencies after Vice Foreign Minister Shotaro Yachi said in Washington that North Korea may explode a bomb ``as soon as this weekend.'' The yen slid 0.8 percent against the dollar on July 5, when the communist nation test-fired missiles.

``That has certainly raised concerns,'' about regional security,'' said Derek Halpenny, a currency strategist in London at Bank of Tokyo Mitsubishi. ``It's a factor weakening the yen going into the weekend.''

The yen fell to 118.02 versus the dollar at 7:12 a.m. in New York, from 117.71 late yesterday, the biggest drop in a week. It also slipped to 149.63 against the euro from 149.40. The euro traded at $1.2676 from $1.2694.

Gains for the dollar may be limited before a government report that's likely to show the U.S. economy added the fewest jobs in four months in September.

Losses for the yen accelerated after Japanese Economic and Fiscal Policy Minister Hiroko Ota said the weakness of the yen's real effective exchange rate has helped to sustain growth in the world's second-largest economy.

``The effective exchange rate has fallen to levels of the 1980s, and it's true that this is supporting the economy,'' Ota told lawmakers in parliament in Tokyo today.

Trade-Weighted Measure

The Bank of Japan's trade-weighted measure of the yen's performance against major trading partners slipped to 101.3 last month, the lowest since September 1985.

Yachi made the comments late yesterday to U.S. Undersecretary of Defense for Policy Eric Edelman, a Japanese Foreign Ministry official said today, speaking on condition of anonymity.

North Korea on Oct. 3 said it would conduct a nuclear test. South Korea, China and Japan called for the country to abandon the plan and return to six-nation talks with Russia and the U.S. on dismantling its uranium processing program.

A nuclear test is a threat to Japan, as Tokyo is 1,295 kilometers (809 miles) from Pyongyang. North Korea's firing of missiles in July sparked a debate on whether Japan should consider pre-emptive strikes, which are banned under current law.

The Labor Department today will say companies added 120,000 workers last month, down from 128,000 in August, according to a Bloomberg survey of 73 economists. Slower hiring may ease pressure on wages and contain inflation.

`Probably Weaken'

``The way the market is looking at the U.S. economy and rates, the dollar should probably weaken through the rest of the year,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney.

Federal Reserve officials this week expressed concern about inflation, suggesting the central bank won't rush to lower borrowing costs.

Fed Vice Chairman Donald Kohn and Philadelphia Fed President Charles Plosser said this week that price pressures are a bigger danger than slower growth.

The Fed left its interest-rate target for overnight loans between banks at 5.25 percent in August and September after 17 consecutive increases. The next policy meeting is Oct. 25.

``The Fed is not yet finished hiking rates,'' said Steve Barrow, chief currency strategist at Bear Stearns Cos. in London. ``We could see the dollar gan some strength as a consequence of tighter policy if that comes into the frame.''

`Tube of Toothpaste'

The euro may garner support from speculation rising interest rates will attract investors to the region's financial assets. The yield gap between German two-year government bonds and U.S. Treasuries shrunk to a 19-month low this week.

The European Central Bank yesterday increased the benchmark lending rate to 3.25 percent from 3 percent and President Jean- Claude Trichet signaled it will do so again by December to curb inflation. Investors anticipate an increase to 3.5 percent.

``We mustn't wait for the risks to materialize,'' Trichet today said in an interview with French radio station Europe 1. ``It's like a tube of toothpaste. Once it is out of the tube, it's difficult to get back in.''

``We're positive on the euro,'' said Stephen Halmarick, co- head of economic and market analysis at Citigroup Global Markets Australia Ltd. in Sydney. ``The ECB was more hawkish than we expected, so we weren't going for another rate hike, but now we are.'' Europe's currency will gain to $1.28 by year-end, he forecast.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: October 6, 2006 07:15 EDT