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The yen headed for its biggest weekly gain in three months against the euro as a decline in global stock markets caused investors to sell higher-yielding assets financed with loans from Japan.

The currency was also set for the first winning week in four versus the dollar on signs credit-market turmoil persists after American International Group Inc., the world's largest insurer by assets, said it needed to raise capital after posting a loss. The euro rebounded from an eight-week low against the dollar after European Central Bank President Jean-Claude Trichet said inflation remains the bank's top priority.

``Subprime problems come on and off as if they were a ghost, prompting yen buying on investors' risk reduction,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``Subprime problems won't be over in the coming two years, and firms will cause further losses. Risks prevail.''

The yen traded at 159.78 per euro at 9:35 a.m. in Tokyo from 159.72 late in New York yesterday and 162.53 a week ago. It rose to 159.05 a euro yesterday, the highest since April 14. Japan's currency was at 103.73 a dollar from 103.74 yesterday and 105.40 a week earlier. The dollar traded at $1.5404 per euro, compared with $1.5393 yesterday and $1.5424 a week ago.

Japan's currency may rise to 100 per dollar by the end of June, Saito forecast.

The yen extended gains after AIG said it plans to raise $12.5 billion to shore up finances stemming from the subprime mortgage collapse. The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year, discouraging investors from so- called carry trades.

Carry Trade

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8.25 percent in New Zealand and 7.25 percent in Australia. The yen traded at 97.99 per Australian dollar from 97.89 yesterday in New York and 98.49 a week ago. It was at 80.11 per New Zealand dollar from 80.03 yesterday and 82.19 a week earlier.

The ECB yesterday held interest rates at a six-year high as consumer prices in the 15 countries that share the euro rose 3.3 percent last month from a year earlier. They increased 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left borrowing costs unchanged since June of last year.

`Protracted Period'

Inflation will stay high ``for a rather protracted period,'' Trichet said at a press conference in Athens following the ECB's decision to keep its main refinancing rate at 4 percent.

``Inflation is clearly quite high by historical standards for the euro zone,'' said Clifford Bennett, chief economist at Sonray Capital Markets Ltd. in Sydney, in an interview with Bloomberg Television. ``I'm continuing to call the ECB as on hold through the year. We may well just shoot straight up to $1.55 within 24 hours.''

The common European currency has gained 5.6 percent against the dollar this year. It's fallen 3.9 percent against the dollar since rising to a record $1.6019 on April 22 and is poised for its third weekly loss.

Demand for dollar assets has risen on speculation the Federal Reserve is done cutting interest rates. Futures on the Chicago Board of Trade show an 82 percent chance the Fed will hold its target lending rate at 2 percent on June 25. The balance of bets is for a cut of a quarter-percentage point.