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Dollar, yen weaken as Yellen testimony boosts risk appetite

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The safe-haven dollar and yen fell on Friday after Federal Reserve Vice Chair Janet Yellen lifted investor appetite for riskier assets by defending the U.S. central bank's current stimulus measures.

Yellen, speaking at her confirmation hearing before the Senate Banking committee on Thursday, stated that the Fed will keep its stimulus program intact until the U.S. economy shows more strength and stability.

Her comments have dented the low-yielding yen, pushing the dollar to a two-month high against the Japanese currency. The yen typically falls when investors are looking to take on risk.

The dollar, on the other hand, slid to a one-week low against the euro.

(Read more: Yellen: Fed must promote strong recovery)

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Data on Friday showed U.S. industrial production dipped unexpectedly in October as output at power plants and mines declined, but a third straight month of gains in manufacturing output suggested the economy remained on a moderate growth path.

"The moderate pace of growth in the U.S. economy no doubt exacerbated by the budget impasse and lack of progress in the job market may explain why the Fed will continue with the monthly purchases," said Sean Cotton, vice president and senior trader at Bank of the West in San Ramon California. "As a result, the dollar is extending its decline and expectation is for weakness until the Fed indicates otherwise. This may be the trend until March."

The dollar index fell 0.2 percent to 80.85. On the week, the dollar index was down 0.6 percent, its weakest weekly performance since Oct. 18.

The euro was up 0.2 percent at $1.3489, after touching $1.3505, its highest since Nov. 7. It gained 0.8 percent against the dollar this week.

Despite Friday's gains, analysts said the euro's overall outlook looked less upbeat than the dollar given the disparity between the U.S. and European economies. Weak euro zone GDP numbers on Thursday have kept alive the possibility of more central bank action to stimulate growth.

The yen fell broadly, with sterling hitting a four-year high against the Japanese currency. The pound was last at 161.43 yen, up 0.5 percent.

The dollar rose 0.2 percent to 100.22 yen, having touched a high of 100.43 yen earlier in the global trading day and giving it the potential to target the Sept. 11 high of 100.60 yen.

The euro was also higher against the yen, hitting a two-week high of 135.25 yen. It last traded 0.2 percent at 135.17 yen.

For the week, the dollar gained 1.1 percent against the yen, its third straight weekly advance.

"The dollar/yen exchange rate broke a series of lower highs dating back to its multi-year peak, and indeed the surge offers evidence that it may yet continue higher," said David Rodriguez, quantitative strategist at DailyFX in New York.

Options markets showed some investors betting on dollar strength against the yen in the weeks to come.

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