The yen rose on Thursday, climbing to 2-1/2-month highs against the dollar, as investors spooked by growing credit markets problems fled risky assets.

A report showing lower-than-expected U.S. durable goods orders in June helped push the dollar lower against the yen.

The dollar fell to 119.53 yen, down 0.7 percent from Wednesday. The euro was down 0.8 percent to 164.00 yen after plumbing a 1-month low of 163.97 yen.

Turmoil in the U.S. subprime mortgage market has begun to spill over into higher credits, causing fears about liquidity and pressuring carry trades, in which investors borrow cheaply in yen to buy higher-yielding currencies.

Financial stress is driving financial markets and the yen's breaching of 120 per dollar doesn't bode well for markets, said Michael Metz, chief investment strategist at Oppenheimer & Co. in New York.

"This I think could force some carry traders to change their strategy," he said.

(Published by Reuters, July 26, 2007)