The Japanese yen fell sharply against both the U.S. dollar and the euro on Thursday after Standard & Poor's cut Japan's long-term credit rating while the prospect of higher European interest rates weighed on commodities' prices.

Wall Street stock indexes held near 29-month highs, boosted by strong earnings from companies like heavy equipment maker Caterpillar Inc .

Standard & Poor's cut Japan's rating one notch to AA-minus, citing the country's ballooning fiscal deficit, but Japanese stock markets, which closed before the downgrade news, appeared poised to open higher on Friday as Nikkei futures traded in Chicago rose 55 points to 10,510.

S&P's move will have a limited impact on Japan's ability to raise money on financial markets, but it raised a red flag with investors about government budget deficits in other developed economies.

It is reasonable to expect that the Japanese downgrade will raise concerns over the sovereign rating of the U.S., said Vasileios Gkionakis, macro strategist at Fulcrum Asset Management LLP in London, which oversees $900 million in assets.

The yen fell to a two-month low against the euro and a two-week low against the U.S. dollar. The euro in turn was boosted against the greenback, after European Central Bank member Lorenzo Bini Smaghi said an expected rise in the prices of imported goods could not be ignored.

Commodity prices were mostly lower as the prospect of rising interest rates in Europe grew. Bini Smaghi, one of six ECB executive board members, added his voice to a growing chorus of concern among the central bank's policy makers over inflation in commodities and emerging-economy made goods.

The ECB has started to show more concern about secondary price pressures, and the market has acknowledged that, said Gavin Friend, currency strategist at nabCapital.

The euro hit a two-month high of $1.3759, but later pared gains to trade at $1.3726, up 0.21 percent. Against the yen, however, the euro held onto gains, up 0.97 percent at 113.77.

Bini Smaghi's comments went to the heart of current investor concerns, highlighting the potential for inflation to prompt central banks to raise interest rates at a time when low rates are seen as key to boosting renewed economic growth.

Gold prices fell to a four month low, off $33.98, or 2.53 percent, to $1,311.50 on the growing expectation that higher rates would ultimately make bullion a less attractive investment.

Talk of more oil output from OPEC cooled crude prices. U.S. light sweet crude oil fell $1.69, or 1.94 percent, to settle at a two-month low of $85.64 a barrel.

STOCKS EDGE UP

Global stock markets were mostly higher. Mixed U.S. economic data on Thursday pointed toward growth momentum with U.S. housing and factory data higher, but concerns lingered about employment as weekly claims for jobless benefits were larger than expected.

Economists said they expected Friday's reading of gross domestic product to show the U.S. economy picking up speed albeit short of the pace needed to boost job growth.

At the New York close, the Dow Jones industrial average <.DJI> gained 4.39 points, or 0.04 percent, to 11,989.83. The Standard & Poor's 500 Index <.SPX> rose 2.91 points, or 0.22 percent, to 1,299.54. The Nasdaq Composite Index <.IXIC> climbed 15.78 points, or 0.58 percent, at 2,755.28.

Microsoft Corp shares rose 0.31 percent to $28.87. The world's largest software maker surprised Wall Street with a better-than-expected profit, but its shares stayed flat as investors expressed concern about the weakness of computer sales amid a faltering U.S. recovery.

Caterpillar shares rose 0.91 percent to $96.63 after it reported a stronger-than-expected quarterly profit.

Movie rental company Netflix Inc closed at a record high $210.87, up 15.21 percent on the day after posting better-than-expected results Wednesday after the close.

World stocks as measured by MSCI were up around 0.18 percent. The pan-European FTSEurofirst 300 <.FTEU3> index of top shares closed up 0.16 percent at 1,152.71.

Corporate earnings season has been pretty good. But there is a lot of complacency -- investors began the year feeling good about the trends after a good December. The macro backdrop may give further cause for concern -- there is still some fragility, and it will challenge the benign view, said Bill Dinning, head of strategy at Aegon Asset Management in Edinburgh.

Euro zone government debt yields rose as investors sold bonds, and the premium investors demand to hold paper from peripheral euro zone nations rather than German debt also widened.

Benchmark 10-year U.S. Treasuries rose 6/32 of a point, yielding 3.39 percent after demand for an auction of Treasury debt was met with strong demand..

(Additional reporting by Reuters correspondents around the globe)

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