By Daniel Kruger and Kim-Mai Cutler Oct. 10 (Bloomberg) -- The yen headed for its biggest weekly gain in a decade against the dollar as the global stock- market rout prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency. Japan's currency was poised to rise the most versus the euro in any week since the 15-nation currency's debut in 1999 as the Dow Jones Stoxx 600 Index headed for its biggest one-day drop on record, discouraging carry trades. Group of Seven finance ministers and central bankers meet today in Washington to discuss the global financial crisis. ``Investors are concerned it could get worse,'' said JensNordvig, a currency strategist at Goldman Sachs Group Inc. in New York. ``Clearly a lot of investors have only one goal, to preserve capital.'' The yen rose 0.9 percent to 98.97 per dollar at 9:33 a.m. in New York, from 99.82 yesterday. It reached 97.92, the strongest since March 19, and is up 6 percent this week. Japan's currency advanced 1.3 percent to 134.07 per euro, from 135.83. It touched 132.83, the strongest since July 2005. The euro fell 0.5 percent to $1.3540, from $1.3604, 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, putting stocks on course for their worst week in 30 years. The cost of borrowing in dollars in London for three months rose to 4.82 percent today, the highest since December, the British Bankers' Association said. U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with counterparts from the G- 7, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan. G-7 Alternatives Threatened by the worst economic outlook in a quarter- century, G-7 officials arrived in Washington without a broad- based strategy that investors were seeking. Among the options is a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that Paulson hasn't ruled out. Japan will suggest at the G-7 meeting that the International Monetary Fund establish a lending program to help developing 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, the Mideast and developed countries, the newspaper said. 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. Euro vs. Dollar Europe's currency is on course for its second straight weekly decline versus the dollar on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest Rates further. The bank lowered its benchmark rate two days ago for the first time in five years. The pound fell as much as 1.8 percent to $1.6792, breaching $1.70 for the first time since November 2003. The South Korean won surged as much as 11 percent to 1,224.95 per dollar after a meeting among financial regulators fueled speculation the government will intervene to support the currency, which yesterday reached a decade-low 1,485.32. 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. Stronger Yen The yen gained 20 percent this week to 65.55 versus the Australian dollar, 15.4 percent to 58.97 against New Zealand's currency, known as the kiwi, and 7.6 percent against the euro on speculation investors will reverse trades in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia, 7.5 percent in New Zealand and 3.75 percent in Europe. ``It has been most volatile against the Aussie and kiwi, and the big move is to the downside,'' said Derek Halpenny, the European head of global currency research at Bank of Tokyo- Mitsubishi Ltd. in London. ``If you stand back from this, the moves we have seen are extreme. We should continue to see the yen as the star performer.'' Implied volatility on one-month dollar-yen options, a measure of expectations for future currency moves, rose to 32.18 percent, the highest since Bloomberg began compiling the data in 1996. Higher volatility can wipe out carry trade profits. ``People in the options market are saying this is some of the most frantic activity they have seen,'' said Geoffrey Yu, a foreign-exchange strategist in London at UBS AG, the second- biggest currency trader. ``You don't want outright cash exposure to the yen because it's so volatile. That's why people are going into options.'' Currency volatility mirrored turbulence in global stock markets as the VIX, the Chicago Board Options Exchange Volatility Index surpassed 60 for the first time yesterday. The VIX jumped 11 percent to 63.92. The Standard & Poor's 500 Index tumbled 2.9 percent today. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

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