By Kim-Mai Cutler and Andrew MacAskill Oct. 7 (Bloomberg) -- The yen fell from a three-year high against the euro as traders slowed sales of higher-yielding currencies funded in Japan on speculation the U.K. government will provide cash for banks to bolster their balance sheets. The Japanese currency also slid from a six-month high against the dollar as Iceland took control of it's second- biggest lender and said it's negotiating an emergency loan from Russia. The yen declined earlier after the Reserve Bank of Australia lowered interest rates by the most since 1992. ``We're at levels where the yen is looking slightly expensive,'' said Adrian Schmidt, a senior foreign-exchange strategist in London at Royal Bank of Scotland Group Plc. ``There's bad financial news out there but the foreign-exchange market has moved to price it in.'' The yen traded at 138.89 per euro as of 7:38 a.m. in New York, from 137.50 yesterday, when it touched 135.05, the strongest since September 2005. Japan's currency was at 102.17 per dollar from 101.82. The euro was at $1.3592 from $1.3499. It touched $1.3444 yesterday, the lowest since August 2007, when the credit crisis started to gain momentum. Iceland said it was in talks to secure a 4 billion-euro ($5.43 billion) loan from Russia. The country also pegged the krona to a trade-weighted index and nationalized Landsbanki Islands hf after the currency slumped as bad debts crippled the financial system. In the U.K., Chancellor of the Exchequer Alistair Darling and Bank of England Governor Mervyn King met with banking chief executive officers including Royal Bank of Scotland's Fred Goodwin and Barclay Plc's John Varley yesterday to discuss a 45 billion-pound ($79 billion) cash injection, said two people with knowledge of the situation. Australian Rate Cut The Reserve Bank of Australia lowered its overnight cash rate target to 6 percent from 7 percent, adding to last month's quarter-point reduction. Economists surveyed by Bloomberg News expected a cut to 6.5 percent. The Bank of Japan today left its benchmark rate unchanged at 0.5 percent. The Australian dollar fell 1 percent to 72.80 yen. ``There is a degree of optimism that we will see coordinated rate cuts, which is increasing risk appetite and weighing on the yen,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``In the near term, if these drastic steps do come to fruition, then we could see a drop in the recent yen gains, which have been excessive.'' The likelihood the world's largest economies are on the brink of a recession is raising speculation central banks will cut interest rates to revive growth. The Bank of England meets on Oct. 9 to set borrowing costs, a day before finance ministers and central bankers from the Group of Seven nations gather in Washington to discuss the deepening credit-market crisis that has stalled bank lending. `Got to Go' ``The Bank of England has been really resisting it for a long time but now they've got to go'' for lower rates, said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. ``The tide is certainly turning toward rate cuts that weren't on the agenda even a couple of weeks ago.'' Europe's benchmark Dow Jones Stoxx 600 Index rose 0.7 percent, rebounding from yesterday's losses, which were the most since 1987. Royal Bank of Scotland, the U.K.'s second-biggest bank, had its credit rating cut for the first time in almost a decade by Standard & Poor's, which said the company's ``financial profile'' is deteriorating. `Focus on Europe' Gains in the euro may be limited on speculation European authorities will fail to come up with a joint rescue plan for the region's beleaguered financial system. The U.S. government has earmarked $700 billion to buy distressed assets from lenders following the collapse of banks including Lehman Brothers Holdings Inc. UBS AG, the second-biggest currency trader, lowered its three-month euro-dollar and euro-yen forecasts today, citing ``a combination of increased need for dollar liquidity by the banking system and ongoing liquidation of risk positions by investors.'' The 15-nation currency will trade at $1.35 and 142 yen in three months, a team including strategist Ashley Davies in Singapore, wrote in a research note today. The bank's previous forecasts were $1.47 and 154 yen, respectively. ``Let's focus on Europe and who's going to fail and how are they going to build it up,'' said Joseph Tan, chief economist for Asia at Credit Suisse Private Banking in Singapore. ``I wonder if they can come together and form a comprehensive package. The euro is negative against the dollar.'' Luxembourg Meeting European finance ministers are meeting in Luxembourg today. The German government and the country's banks and insurers agreed on a 50 billion-euro ($67.9 billion) rescue of Hypo Real Estate Holding AG on the weekend after an earlier bailout plan faltered. BNP Paribas SA, France's biggest bank, agreed to take over Belgian units of Fortis after a government rescue of the lender failed. Money-market rates climbed to records, continuing a credit squeeze as banks hoard cash. The cost of borrowing in dollars overnight rose to 3.94 percent, from 2.37 percent, according to the British Bankers' Association. ``Short-term the dollar comes through a winner on this,'' said Adam Cole, head of global currency strategy at RBC Capital Markets in London. ``U.S. investors are selling overseas assets and buying dollars or overseas investors are buying U.S. assets and using dollars. You will live or die by your dollar view.'' Rate Cut Bets Futures on the Chicago Board of Trade show a 52 percent probability the Federal Open Market Committee will slash its 2 percent target rate for overnight bank loans by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting. Traders saw no chance of a cut of that magnitude a month ago. ``Given the unstable nature of markets presently, debate on whether the FOMC will have to do an inter-meeting rate cut continues,'' Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a research note today. ``Our economists still believe as a base case that the Fed will wait until the next scheduled meeting on Oct. 28-29 for a 50 basis-point rate cut. However, a further unsettling deterioration in global markets could prompt an earlier move.'' Traders are betting the ECB will lower its benchmark interest rate. The implied yield on the March 2009 Euribor futures contract dropped to 3.665 percent from 3.815 percent yesterday. German factory orders rose for the first time in nine months in August, ending their longest-ever losing streak. Orders, adjusted for seasonal swings and inflation, jumped 3.6 percent from July, the Economy Ministry in Berlin said today. That's the most since October 2007. Economists expected a gain of 0.5 percent, the median of 28 forecasts in a Bloomberg News survey showed. From a year earlier, orders dropped 7.6 percent. To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net

Source