Aug. 11 (Bloomberg) -- The yen rose to the highest in three weeks against the dollar as a government report showed foreign investors bought the most Japanese shares in five months.

Japan's Nikkei 225 Stock Average today reached a four-year high amid optimism the economy is strengthening. The country's current account surplus unexpectedly rose in June as exports climbed, a government report showed today. The yen is also heading for the fourth week of gains in five on speculation Prime Minister Junichiro Koizumi may win next month's elections.

``The strong inflows into the Japanese stock market are driving the yen higher,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. ``There is some fresh economic optimism and that should persist.''

Against the dollar, the yen rose as far as 110.11, the highest since July 21, and was at 110.21 at 10:03 a.m. in London, from 110.65 late yesterday in New York, according to EBS, an electronic currency-dealing system. Japan's currency also gained to 136.75 per euro, from 136.95.

Foreign investors bought a net 495 billion yen ($4.49 billion) of Japanese stocks in the week ended Aug. 5, the Ministry of Finance said today. The Nikkei closed at 12,263.32, the highest since August 2001.

``With foreigners' attitudes improving toward Japan, the inflow will remain reasonably strong into Japanese equities and that should push up the value of the yen,'' said Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors, which manages the equivalent of $61.2 billion.

AMP may buy Japanese stocks, Oliver said. The yen will climb toward its Jan. 17 high of 101.69 by the end of the year he said.

Highest Since May

The euro touched a 2 1/2-month high against the dollar as the European Central bank signaled growth is improving. The euro rose to $1.2415, from $1.2382.

Recent economic data show ``some improvement'' in the euro region economy, which will probably expand at a ``sustained, gradual'' pace, the European Central Bank said today in its monthly bulletin.

The quarterly growth rate will probably quicken to 0.4 percent in the current and subsequent quarters, according to the median forecast of 18 economists in a Bloomberg survey. The European Union said today that growth was 0.3 percent in the April to June period.

``People are seeing a slow but gradual recovery for the European economy,'' said Hideaki Inoue, a currency manager in Tokyo at Mitsubishi Trust & Banking Corp., a unit of Japan's second-largest lender. ``That will make more investors interested in the euro,'' which may reach $1.26 next quarter.

$1.2430 Barrier

Gains in the euro above $1.2430 may be difficult to sustain because traders have placed automatic orders to sell the currency at that level, according to Uwe Parpart, a currency strategist at Bank of America Corp. in Hong Kong. The common currency hasn't closed above that level since May 31.

Declines for the dollar may also be limited as a report today is expected to show sales at U.S. retailers jumped the most in a year last month. Sales probably increased 2.1 percent following a 1.7 percent gain in June, according to the median estimate of 69 economists surveyed by Bloomberg.

The Japanese government and central bank both said this week that growth is gathering strength. The economy probably expanded 0.5 percent in the second quarter, extending a recovery from its fourth recession since 1991, a Bloomberg News survey of 39 economists showed.

Yen `Getting Momentum'

``The yen is getting momentum from economic recovery,'' said Satoshi Yaguchi, a foreign-exchange manager in Tokyo at Chuo Mitsui Trust and Banking Co. Ltd. ``Gross domestic product data tomorrow will also probably confirm that the Japanese economy is on the right track, leading to a stronger yen.''

The Japanese currency may advance to 109.80 against the dollar today, Yaguchi said.

Japan's current account surplus widened to 1.5 trillion yen ($13.6 billion), the finance ministry said today, as exports climbed the most in more than a year.

Royal Bank of Canada currency strategists, led by Monica Fan in London, advised investors to buy the yen in a morning report to clients today.

Orders to buy shares by overseas funds outnumbered those to sell by 58.3 million before the market opened at 9 a.m., the most since at least 2000, according to Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.

Koizumi this week called elections for Sept. 11 after parliament rejected his proposals to sell the state-run postal service. The prime minister staked his career on plans to end state control of Japan Post's 350 trillion yen of assets, the world's biggest saving bank.

Koizumi's rating rose to 47 percent, up 4 points from a prior poll, according to a Nihon Keizai newspaper survey of 1,093 people. Some 45 percent of participants said they would support an administration led by Koizumi, compared with 20 percent who would back the opposition Democratic Party of Japan, the survey showed.

To contact the reporter on this story: Rodrigo Davies at rdavies13@bloomberg.net

Last Updated: August 11, 2005 05:06 EDT