By Stanley White and Ron Harui

Oct. 10 (Bloomberg) — The yen rose against the dollar, headed for its biggest weekly gain in a decade, on speculation a global stock-market rout will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency.

The yen was on course for its largest weekly gain versus the euro as the Dow Jones Industrial Average and Nikkei 225 Stock Average both fell below 9,000 for the first time since 2003. Group of Seven finance ministers and central bankers meet today and tomorrow in Washington to discuss financial turmoil that has wiped more than $8 trillion off the value of global stocks this month and led to interest-rate cuts and bank bailouts in most of the member nations.

“The basic trend is to buy the yen,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan’s largest brokerage. “The credit crunch is spreading from the financial sector to other companies, meaning currency traders can’t take on risk. The G-7 may not be able to repair money markets quickly enough.”

The yen rose to 99.39 per dollar at 6:52 a.m. in London from 99.82 late yesterday in New York, up 6 percent this week. It touched 97.92, the strongest since March 19. Japan’s currency was at 134.49 versus the euro from 145.11 on Oct. 3, heading for the largest weekly gain since the single currency’s creation in 1999. It reached 132.83, the strongest since July 2005.

The euro fell to $1.3524 from $1.3604, on course for its second weekly decline. The British pound fell as low as $1.6792, breaching the $1.7000 level for the first time since November 2003. The yen may rise to 98 per dollar today, Amikura said.

Against the Australian dollar, the yen traded at 65.88, on course for a 24 percent gain this week. Japan’s currency soared by 18 percent against the New Zealand dollar this week to 58.95.

MAS Policy

The South Korean won surged as much as 11 percent to 1,250.50 per dollar after a meeting among financial regulators fueled speculation the government will intervene to support the currency, which yesterday reached a decade-low 1,485.50. The nation’s foreign-exchange reserves dropped in each of the past six months, sliding $24.6 billion to $239.7 billion as the Bank of Korea used the funds to stem the won’s slide.

The Singapore dollar fell to S$1.4807 against the greenback from S$1.4686 after the Monetary Authority of Singapore ended a policy favoring gains in its currency as the economy slows.

The Nikkei 225 tumbled as much as 11 percent and the Dow plunged 7.3 percent yesterday.

Japanese Finance Minister Shoichi Nakagawa said yesterday in Washington that he is closely watching the stock and currency markets and he will consider all options in tackling the financial crisis.

Carry Trades

The yen has surged 28 percent versus the Australian dollar, 20 percent against New Zealand’s currency and 11 percent against the euro this month as investors pared so-called carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Japan’s benchmark rate is 0.5 percent, compared with 6 percent in Australia and 7.5 percent in New Zealand.

“Global financial stability risks remain acute and questions are mounting about the follow-on effects to global growth prospects,” wrote Ron Leven, currency strategist at Morgan Stanley in New York, in a research note yesterday. “We are short dollar-yen, euro-yen and pound-yen.” A short is a bet a currency will fall.

The dollar’s one-month 25-delta risk-reversal rate against the yen widened to minus 7.01 percent today, the most since Bloomberg began compiling data in October 2003, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell.

Rate Cuts

Coordinated interest-rate reductions by central banks in the U.S., Europe and Asia in the past two days failed to revive lending among banks. The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent yesterday, the highest level since Dec. 28.

U.S. Treasury Secretary Henry Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan, including having the government acquire preferred stock, two officials informed of the matter said. Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with their counterparts from the G-7 group, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan.

The dollar touched a 14-month high of $1.3444 per euro on Oct. 6 as the freeze in credit markets and global stock losses boosted demand for U.S. Treasuries. Banks’ reluctance to lend to each other also caused a shortage of dollars for funding, accelerating the currency’s gain.

Currency Reserves

Japan will propose at the G-7 meeting that the International Monetary Fund establish a lending program to help emerging countries deal with the financial crisis, the Nikkei newspaper reported today, without citing anyone. The program would be funded with foreign-exchange reserves from Japan, China, Middle Eastern and developed countries, the newspaper said.

The dollar accounted for 63.9 percent of total reserves held by governments and central banks at the end of 2007, according to IMF data. China and Japan are the two biggest holders of Treasuries.

“I can’t imagine the U.S. would agree to such a plan,” said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly listed lender. “This could threaten demand for Treasuries at a time when the U.S. needs to borrow money for its bank bailout. This is also a negative for the dollar.”

European Rates

The euro headed for a second weekly loss against both the dollar and the yen on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates. The bank two days ago lowered its benchmark rate for the first time in five years.

The currency has fallen 7.3 percent versus the yen this week, the most since the euro’s debut in 1999. ECB policy makers said yesterday they expect the region’s economic growth will remain weak for some time.

“Right now, financial institutions in Europe appear to be in trouble,” said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan’s fifth-largest publicly traded lender by assets. “The ECB may reduce rates further. The euro is likely to retest the downside.”

The odds of a rate cut at the ECB’s next policy meeting on Nov. 6 were 46 percent yesterday, according to a Credit Suisse Group derivatives index.

This article was derived from bloomberg.com/apps/news?pid=20601087&sid=aVkVu3p842AQ&refer=home