By Ye Xie and Kim-Mai Cutler Oct. 8 (Bloomberg) -- The dollar declined against the euro as global central banks made coordinated reductions in borrowing costs, reducing demand for the U.S. currency as a haven from credit market turmoil. The pound rose against the greenback after the Bank of England joined in cutting interest rates and said it will invest 50 billion pounds ($87 billion) in financial institutions. The dollar rose to a 14-month high versus the euro on Oct. 6 as the financial crisis spurred a surge in demand for U.S. currency funding in money markets. ``A major dollar funding squeeze has supported the dollar dramatically,'' said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs Group Inc. ``What this might do is reduce the funding squeeze and lead to some retracement of recent dollar strength.'' The dollar dropped 0.5 percent to $1.3651 per euro at 8:57 a.m. in New York, from $1.3588 yesterday. It touched $1.3444 on Oct. 6, the strongest since August 2007, when the credit market crisis gathered momentum. The U.S. currency fell 1.5 percent to 99.96 yen, from 101.47. The euro dropped 1.1 percent to 136.42 yen, from 137.89. The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent, while the European Central Bank and the central banks of the U.K., Canada, Sweden and Switzerland also reduced rates. Separately, China's central bank lowered its key one-year lending rate. Aussie Pares Loss The Australian dollar pared its loss against its U.S. counterpart as the global cuts in borrowing costs revived demand for higher-yielding currencies. The Aussie fell 6.1 percent to 66.46 U.S. cents, after earlier dropping as much as 8.6 percent to 64.50, the lowest since September 2003. The Reserve Bank cut Australia's target lending rate by 1 percentage point to 6 percent yesterday. ``It's a war on many fronts,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Rate cuts are a small part of the solution. It should give a decent boost to risk appetite.'' Sterling increased 0.3 percent to $1.7511 after the Bank of England cut its lending target by a half-percentage point to 4.5 percent, the biggest cut since 2001. The government offered to buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other Banks, and provide about 250 billion pounds of loan guarantees to refinance debt. The Bank of England canceled its scheduled interest rate decision tomorrow, an official said. `Glimmer of Hope' ``It's given the market a glimmer of hope that policy makers are getting head of the crisis,'' said David Woo, global head of foreign-exchange strategy at Barclays Capital in London. Implied volatility on one-month euro-dollar options reached 20.11 percent, an all-time high. Implied volatility on one-month dollar-yen options soared to 25.42 percent, the highest since October 1998. Finance ministers and central bankers from the Group of Seven nations will meet in Washington Oct. 10 to discuss the deepening financial crisis. Measures to stabilize global stock markets will be on the agenda, according to a Japanese official who briefed reporters on condition of anonymity before the central banks' announcement. The G-7 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S. ``The coordinated rate move is a confidence booster,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank. ``The actions are a good sign for the upcoming g7 meeting. It's showing that some sort of coordination may be taking place.'' Global Rate Cuts The ECB's main refinancing rate is now 3.75 percent; Canada's fell to 2.5 percent; the Bank of England's rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. Separately, China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

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