Reuters - The yen dropped to five-year lows against the dollar on Monday, extending 2013's losses to more than 17 percent on a mix of improving sentiment on the global economy, rising investor risk appetite and expectations of more Bank of Japan stimulus.

Unlike the past few years when financial markets lurched from debt crisis in Europe to U.S. political deadlock, investors are generally upbeat on the global economic outlook next year - at least for now.

The euro and its European peers held near two-year highs against the dollar, supported by comments from the European Central Bank chief that there is no urgent need to cut rates.

The dollar rose to 105.415 yen, its highest level since October 2008, and last stood at 105.32 yen. The yen has been the weakest major currency this year.

"For the moment, the market wants to carry on the latest trend as far as it can," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy in Tokyo.

The euro stood at 144.82 yen, having hit a five-year high of 145.675 yen on Friday. The Swiss franc rose above 118 yen, to be at its highest in more than 30 years.

A brighter global economy tends to lead to higher foreign investment by Japanese investors, depressing the yen. Rises in U.S. bond yields also underpin the dollar against the lower-yielding yen.

The 10-year U.S. notes yield hit a two-year high above 3.0 percent.

Further, the BOJ's pledge to keep rates low is seen encouraging yen-carry trades, in which investors borrow the yen and buy higher-yielding assets, and there is also a view Japan's central bank will increase it stimulus programme in 2014.

News that Japan's most influential business lobby will encourage members to raise workers' base pay for the first time in six years added to positive risk sentiment.

The euro traded at $1.3765, having shot up as high as $1.3894 in thin year-end trade on Friday, its highest since October 2011. It has risen more than 4 percent against the dollar in 2013 and is set for a second straight year of gains.

The end-year rise in the common currency likely reflects some last-minute position adjustments by European banks, which are thought to be repatriating funds to shore up capital ahead of an ECB asset review.

ECB President Mario Draghi said in an interview published on Saturday that he saw no urgent need to cut the euro zone's main interest rate further and no signs of deflation.

Still, the euro could falter if risk of deflation increases. The bloc's inflation rate has been steadily falling from 3 percent in 2011 to below 1 percent in the last couple of months. Inflation data is due on Jan. 7.

"If Italian inflation data on Friday falls short of expectations, then people may think the euro zone inflation data next week could disappoint, possibly reversing the euro," said Praevidentia's Yamamoto.

Elsewhere, the British pound rose to $1.6577, its highest since August 2011, while the Australian dollar was lethargic near three-year lows, fetching $0.8846. It has shed almost 15 percent this year.