By Ye Xie and Anchalee Worrachate Oct. 14 (Bloomberg) -- The yen had its biggest two-day decline versus the euro in almost a month as global government support of banks encouraged investors to buy high-yielding assets funded by low-cost loans in Japan. Japan's currency was poised for a record two-day drop versus the Australian dollar as the U.S. plan to inject $250 billion into banks raised speculation that investors will resume carry trades. The dollar fell against the euro and the pound as governments' efforts to revive bank lending reduced demand for the greenback as a haven. ``It's the unwinding of safe-haven positions,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The coordinated government intervention takes the probability of a 1930s-style depression off the table.'' The yen fell 0.6 percent to 139.40 per euro at 11:13 a.m. in New York, from 138.57 yesterday. It has dropped 3.3 percent over the past two days. The yen decreased 0.3 percent to 102.32 per dollar from 102.01. The euro rose 0.4 percent to $1.3637 from $1.3581. The pound advanced 1.1 percent to $1.7533. Japan's currency pared its losses as the Standard & Poor's 500 Index fell 1 percent after initially gaining today and rallying yesterday the most in seven decades. The Brazilian real, South African rand and Mexican peso rallied as global governments' support of banks spurred demand for high-yielding, emerging-market assets. The real rose 2.9 percent to 2.0830 per dollar, the rand gained 1.8 percent to 9.0022 and the peso increased 1.3 percent to 12.4051. Yen vs. Aussie Against Australia's dollar, the yen fell 0.3 percent to 71.48, after a 10 percent drop yesterday. Australian Prime Minister Kevin Rudd allotted A$10.4 billion ($7.3 billion) in spending for home buyers, families and pensioners. The yen fell 0.9 percent to 63.60 versus New Zealand's dollar. Japan's currency gained 14 percent versus the Australian dollar and 9.5 percent against the New Zealand dollar this month as credit-market losses mounted. ``You'd better play this rebound of the carry trade, but you'd be looking for opportunities to sell this rally in the next couple of weeks,'' said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``The honeymoon will end. We're facing a prolonged period of lackluster growth of the global economy.'' Volatility implied by one-month dollar options against Japan's currency declined 5.97 percentage points yesterday to 23.67 percent, the most since Bloomberg began compiling the data in December 1995. Reduced Volatility Narrowed price swings reduce the risk of trades in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 6 percent in Australia and 7.5 percent in New Zealand. ``Volatility has been falling broadly as we move out of a panic mode,'' wrote analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, in a research note yesterday. ``We expect risk appetite to stay strong, putting yen crosses under pressure.'' The London interbank offered rate, or Libor, for three-month dollar loans dropped 12 basis points to 4.64 percent, reflecting increased willingness of banks to lend. Treasury Secretary Henry Paulson urged banks receiving capital injections to use the funds to spur economic growth. People familiar with the plan said nine financial institutions, including Citigroup Inc. and Goldman Sachs Group Inc., will get $125 billion. European countries committed $1.8 trillion to guarantee loans and invest in lenders yesterday. Japan and Australia pumped $9.1 billion today into money markets after European leaders agreed to guarantee new debt from financial institutions and use taxpayer money to rescue banks. Euro and Economy Action in Europe may not prevent the euro from weakening, some currency strategists and investors said. Morgan Stanley predicts a decline in the euro to $1.25 by 2009, from the all- time high of $1.6038 in mid-July. Strategists at BNP Paribas see weakness after ``some support in the near term.'' ``The euro was overbought, over-owned, over-rated and overvalued,'' said Stephen Jen, global head of currency research at Morgan Stanley in London. Jen correctly predicted in July that the euro would slump just as it began to weaken 15 percent from its record. ``The strategic view has to be that a global recession will keep seeing the euro sold off,'' he said. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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