By Kim-Mai Cutler and Andrew MacAskill Oct. 9 (Bloomberg) -- The yen had its biggest decline against the euro in almost eight years as a flurry of central bank interest-rate cuts helped arrest a slump in stocks, curbing sales of higher-yielding assets funded in Japan. Japan's currency also tumbled versus the U.S., Australian and New Zealand dollars as equities in Asia and Europe rebounded. The pound dropped versus the euro on speculation more interest-rate cuts are needed to avert an economic slump. ``The yen declines reflect greater stability in equity markets following yesterday's rate moves,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. ``Movement on the yen is a good bellwether of any of the mood in risk appetite.'' Japan's currency fell to 137.76 versus the euro as of 7:44 a.m. in New York, from 135.39 yesterday, and traded as low as 139.70, the biggest drop since Jan. 11, 2001. The yen declined to 100.54 per dollar, from 99.14. The euro bought $1.3707, from $1.3654 yesterday. Against the Australian dollar, the yen weakened 7.7 percent to 70.88, and 5.3 percent to 62.70 per New Zealand dollar. Group-of-Seven ministers meeting tomorrow may say the yen's 4.4 percent advance this week against the greenback has been too rapid. Finance ministers and central bankers from the G-7 will meet for two days in Washington to discuss the financial crisis, which has already led to bank bailouts in most of the member nations. The group comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan. `Comfort Zone' ``People will be somewhat reluctant to buy the yen from here,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly traded bank. ``The yen's gains against many currencies are starting to breach the comfort zone, so the G-7 may want to stabilize the currency.'' Technical indicators suggested the yen was poised to fall, after reaching a three-year high against the euro yesterday. The 14-day relative strength index for the Japanese currency was at 82 yesterday, above the level of 70 that signals a reversal may occur. It was at 74 today. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a currency. The dollar's one-month 25-delta risk-reversal rate against the yen was 6.7 percent today, the most since March 17, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell. Against the Australian dollar, the risk reversal rate was 8.3 percent. `One-Sided' ``The options market is very one-sidedly positioned, so it's not surprising with some risk aversion carefully fading'' to see the yen fall, said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. The MSCI World Index rose 0.9 percent as investors speculated the worst five-day rout since 1987 was overdone. Investors had dumped stocks on concern the global economy is headed for a recession as $592 billion of losses stemming from defaults on U.S. subprime mortgages caused credit markets to seize up. The yen surged 19 percent versus the Australian dollar, 14 percent against New Zealand's currency and 8 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. Volatility Implied volatility on one-month dollar-yen options, a measure of expectations for future currency moves, fell to 20.09 percent from 25.05 percent yesterday, when it reached 26.42 percent, the highest since Oct. 20, 1998. Lower volatility may encourage carry trades as it indicates a smaller risk of exchange-rate fluctuations. The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent yesterday, while the European Central Bank and counterparts from the U.K., Canada, Sweden and Switzerland also announced cuts. Central banks in China, Hong Kong and Taiwan lowered their key rates and the Bank of Korea cut its benchmark for the first time in four years. ``You would be looking to buy dollars,'' said Kathy Lien, director of research at GFT Forex in New York, in a Bloomberg Television interview. ``Two to three months down the line the ECB will still be cutting interest rates while the Fed won't. The ECB has a lot more room to cut interest rates.'' Lending Reluctance The dollar gained on speculation financial institutions will seek to buy more of the currency in the foreign-exchange market due to the reluctance of banks to lend to each other. The cost of borrowing in euros for three months held at a record high. The euro interbank offered rate, or Euribor, that banks carge for such loans was unchanged at 5.39 percent. ``External credit pressures remain elevated,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``Part of the reason why the dollar is going up is because of elevated funding pressures.'' The U.S. currency climbed to $1.7171 against the British pound, the strongest since December 2005, before trading at $1.7253. The greenback reached C$1.1293 versus Canada's dollar, the highest since April 2007. To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net

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