By Anchalee Worrachate and Ron Harui Oct. 13 (Bloomberg) -- The euro rose the most in three weeks against the dollar after European leaders agreed to guarantee bank borrowing and prevent failures that would further batter the credit markets. Europe's single currency also strengthened versus the yen as the Federal Reserve and three other central banks announced unlimited dollar auctions to revive the frozen credit markets and the Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem the market turmoil. The British pound advanced against the dollar on speculation the government's bailout plan will avert a banking collapse. ``The rebound in the euro, and in sterling, is a direct response to the clarity of bailout plans in the euro zone and the U.K.,'' said Simon Derrick, head of currency strategy in London at Bank of New York Mellon Corp. ``In the medium-term, this means a surge in national debt which won't bode well for these currencies. In the near-term, the plans give investors confidence that there won't be further banking failures.'' The euro rose as much as 2 percent, the most since Sept. 22, to $1.3671, before trading at $1.3627 as of 1:24 p.m. in London, from $1.3408 in New York on Oct. 10. It advanced by as much as 2.1 percent to 137.77 yen, from 134.96, before trading at 136.66 yen. The dollar was at 100.26 yen, from 100.67 yen. The pound rose as much as 2.1 percent against the dollar to $1.7404, its biggest gain in a month, from $1.7043. Foreign-exchange movements may be exaggerated because trading volumes are lower than normal due to a public holiday today in Japan, the U.S. and Canada, according to Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore. Australian Dollar, Won The Australian dollar rose 5.9 percent to 68.12 U.S. cents after the government guaranteed all bank deposits for three years. South Korea's won climbed 5.4 percent to 1,240.45 per dollar, Mexico's peso gained 2.6 percent to 12.7610 and South Africa's rand strengthened 3.8 percent to 9.1265. European policy makers meeting in Paris yesterday pledged to guarantee until the end of 2009 bank-debt issues with maturities up to five years. Plans to recapitalize banks in the region will cost 300 billion euros ($406 billion), according to Goldman Sachs Group Inc. ``The current financial woes will likely be gradually resolved in the long term,'' said Mitsubishi UFJ Trust's Yamamoto. ``The euro may strengthen.'' Europe's single currency has fallen about 15 percent since trading at a record $1.60 in July as the region's leaders struggled to agree on rescuing financial institutions from the credit seizures that forced Paris- and Brussels-based Dexia SA and Milan-based UniCredit SpA to raise capital because of losses. U.K. Plans The pound rose for the first time in four days as the U.K. government said today it will invest in banks. The currency rose 1.7 percent to $1.7332. Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group will get 37 billion pounds ($64 billion), the government said in a Regulatory News Service statement today. The funding will allow the banks to boost their so-called Tier One capital ratio to more than 9 percent. Losses in the dollar accelerated after the Fed said today the European Central Bank, the Bank of England and the Swiss National Bank will offer financial institutions unlimited funds in the U.S. currency, providing easier access to dollars in response to demand for loans. The central banks will conduct dollar auctions at maturities of seven days, 28 days and 84 days at a fixed interest rate, the Fed said on its Website. ECB Rates Gains in the euro may be limited by speculation the ECB will lower borrowing costs to stimulate the economy, reducing the 15-nation region's interest-rate advantage over the U.S. and Japan, according to UBS AG. The implied yield on the December Euribor contract, a gauge of interest-rate expectations, fell 16 basis points to 3.99 percent today. It was 5.01 percent at the end of last month. ``Over a longer-time horizon, if we avoid a meltdown in the financial system, evolving yield differentials should be supportive of the yen and the U.S. dollar, as European countries have further room to cut interest rates in response to slowing global growth,'' wrote Ashley Davies, a currency strategist in Singapore at UBS, in a research note today. The economy of the euro region, where the benchmark interest rate is 3.75 percent, will expand 1.35 percent this year and 1 percent in 2009, according to the median of 32 forecasts compiled by Bloomberg. Growth in the U.S., whose key rate is 1.5 percent, will be 1.6 percent this year and 1.2 percent in 2009, a separate survey of 75 economists showed. Net Shorts Futures traders decreased bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 18,662 on Oct. 7, compared with net shorts of 28,932 a week earlier. Treasury Secretary Henry Paulson said Oct. 10 that the government will buy equity ``as soon as we can'' in banks and other financial institutions to help them weather the worst credit crisis in seven decades. The Treasury Department said yesterday Paulson is studying Europe's debt-guarantee plan. Finance ministers and central bankers from Group of Seven countries said in a statement after a meeting in Washington on Oct. 11 they will take ``all necessary steps'' to repair credit markets. Yen Versus Dollar ``The G-7 and now the individual finance ministers and governments are really stepping up to try and recover some of this confidence which has been so punished to such low levels over the last few weeks,'' Patrick Bennett, a currency strategist at Societe Generale SA in Hong Kong, said in an interview with Bloomberg Television. ``The rally in the dollar is appropriate.'' The yen may extend gains against the U.S. dollar as Japanese investors start selling some of their more than $1.3 trillion in overseas assets to bring money home because of a global slump in equities, JPMorgan Chase & Co. said. Japan's currency may rise to 95 per dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings, wrote Tohru Sasaki, chief strategist in Tokyo at JPMorgan and a former chief currency trader at the Bank of Japan, in a research note dated Oct. 10. Retail traders held $24 billion of bets the yen will decline on Oct. 9, down 50 percent from last month, the bank said in a report. To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net;

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