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HONG KONG (Thomson Financial) - The US dollar strengthened against the yen in Asian afternoon trade on Friday as some investors took profit in the Japanese currency and others bought the greenback to cover their short positions.

This week, the dollar sank to 105.92 yen, the lowest level in nearly three years, on speculation that the Federal Reserve will cut its key rates by up to 75 basis points at the end of the month.

The dollar also gained on the Bush administration's plan to implement a 150-billion-dollar economic package including tax breaks and higher spending to stimulate the slowing economy. President Bush is scheduled to talk about the economic measures later in the day.

At 1.00 pm (0500 GMT), the dollar was trading at 107.07 yen, up from 106.61 in Sydney this morning.

The euro was buying 1.4644 dollars, little changed from 1.4643 this morning.

"There was quite a heavy selling of the dollar recently, so now we are seeing some position adjustments and profit-taking," said Thomas Lam, treasury economist at United Overseas Bank.

Some investors were also buying the dollar as a "precautionary positioning" because of the three-day weekend ahead. US financial markets will be closed on January 21 for the Martin Luther King holiday.

The dollar has been battered lately by a slew of economic data that raised more worries that the US economy is teetering on a recession including lower manufacturing output and retail sales, weak housing figures, rising jobless rate, and declining consumer confidence. Massive writedowns reported this week by Citigroup Inc, JPMorgan Chase and Merrill Lynch added to the gloomy outlook.

"This is not yet the start of the dollar's recovery," said Lam. "There are still some pressures on the dollar."

Overnight, the Dow Jones Industrial Average slumped 2.5 percent as bleak data on housing and manufacturing and a massive loss from Merrill Lynch fanned recession fears and prompted investors to run for cover.

"As investors become more unhinged, it is likely that we will see more unwinding of high-risk strategies and more unwinding of long currency positions by US and Japanese investors," said John Noonan, an analyst at Thomson IFR.

"The resulting repatriation flows should support the yen and the US dollar against currencies like the euro and Australian dollar."

Elsewhere, the Australian dollar was buying 87.65 US cents from 87.88.

Investors have pared down bets that Australia will raise interest rates because the looming slowdown in global economic output may weaken its currency.

Declining "rate hike expectations will trigger more weakness in the Australian dollar," said John Kyriakopoulos, head of currency strategy at NAB Capital.