By Stanley White and Ron Harui Oct. 8 (Bloomberg) -- The yen rose toward a six-month high against the dollar after the International Monetary Fund said the world economy is headed for a recession next year, with expansion in the U.S. forecast to grind to a halt. The yen also traded near its strongest in three years versus the euro on speculation a global stocks sell-off will prompt investors to reduce holdings of higher-yielding assets financed in Japan, known as carry trades. The British pound gained as Prime Minister Gordon Brown prepares a package that will include injecting capital into struggling banks. ``Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``We're far from out of the woods and any restoration of investor confidence will take time.'' Japan's currency was quoted at 101.16 per dollar as of 1:35 p.m. in Tokyo from 101.47 late yesterday in New York. It rose to 100.24 on Oct. 6, the highest since April 10. The yen traded at 138.05 against the euro from 137.89. It reached 135.05 on Oct. 6, the strongest since September 2005. The dollar slid to $1.3634 per euro from $1.3588. Against the Australian dollar, the yen rose to 71.85 from 72.84 late yesterday in Asia. It also advanced to 63.21 per New Zealand dollar from 64.11. Stocks Slide South Korea's won slid to 1,388.50 against the greenback, the lowest in a decade, as a seizure in global credit markets forced companies to turn to currency exchanges to meet their dollar needs. Nine of Asia's 10 most-used currencies outside of Japan declined today, while China's yuan was little changed. The region's shares also tumbled, extending a global sell- off that's erased more than $5 trillion of market value in the past week. The world economy is headed for a recession next year, with U.S. growth forecast at 0.1 percent, according to International Monetary Fund reports published this week. The stocks rout helped deter carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 4.25 percent in Europe, 5 percent in the U.K., 6 percent in Australia and 7.5 percent in New Zealand. The risk of a carry trade is that currency moves wipe out profits. The yen also was supported as implied volatility on one- month dollar-yen options rose to 23.13 percent from 21.79 percent yesterday, when it reached 23.92 percent, the highest since January 1999. Higher volatility may discourage carry trades as it indicates a larger risk of price fluctuations. U.S. Rates The dollar may weaken further against Japan's currency as the Federal Reserve signals it's prepared to lower interest rates as a credit crisis grips the global economy. Philadelphia Fed President Charles Plosser speaks on monetary policy at 7:45 a.m. in New York today. The Fed ``will need to consider whether the current stance of policy remains appropriate,'' Chairman Ben S. Bernanke said yesterday after the U.S. central bank decided to buy commercial paper and help revive the corporate debt market. ``The dollar is likely to edge lower,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's fifth-largest broker by revenue. ``A possible Fed rate cut highlights how dire the situation is in the U.S. The fundamentals simply aren't sound.'' The dollar may fall to 101.10 yen today, Soma forecast. Interest-rate futures indicate the Fed will lower its 2 percent target lending rate by at least a half-percentage point no later than its next meeting on Oct. 29. U.K. Bank Plan The pound rose to $1.7581 from $1.7455 yesterday. It also advanced to 77.52 pence per euro from 77.87. Prime Minister Brown is compiling a bank rescue package after European Union leaders failed to agree a unified response to the credit crisis following talks over the weekend, three people familiar with the decision said. The U.K. government nationalized Northern Rock Plc and Bradford & Bingley Plc to save them from collapse this year. The Bank of England will reduce its 5 percent benchmark rate by a quarter-percentage point tomorrow, according to the median forecast of economists surveyed by Bloomberg News. Finance ministers and central bankers from the Group of Seven nations will meet in Washington the next day to discuss the deepening financial crisis. G-7 Meeting The ministers will discuss stabilizing global stock markets, said a Japanese official who briefed reporters on condition of anonymity. Joint action on currencies and interest rates should depend on economic conditions in member countries, the official said. The G-7 includes Canada, France, Germany, Italy, Japan, the U.K. and the U.S. UBS AG recommends investors buy the dollar at 102.40 yen, with a target of 107, as governments work to restore confidence in the global financial system. ``The market has reasons to respond positively to efforts from officials in Europe and the U.S.,'' wrote analysts led by Benedikt Germanier, a Stamford, Connecticut-based currency strategist at UBS, in a research note yesterday. ``Efforts may soon reach a critical level in our view, helping investors' sentiment.'' To contact the reporters on this story: Stanley White in Tokyo at Swhite28@bloomberg.net; Ron Harui in Singapore at Rharui@bloomberg.net

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