By Ye Xie and Kim-Mai Cutler Oct. 17 (Bloomberg) -- The yen posted its first weekly decline against the euro in a month as a rally in U.S. stocks encouraged investors to buy higher-yielding assets funded by low-cost loans in Japan. Japan's currency also fell versus the Brazilian real and the Australian dollar as a drop in short-term borrowing costs among banks indicated the credit market may be thawing, spurring demand for carry trades. South Korea's won rebounded today, following the biggest drop in a decade, on bets the government will prop up confidence in financial markets. ``Those people who kept their powder dry may find it's not a bad opportunity to get into the carry trade again,'' said Dave Floyd, global head of foreign-exchange research and trading in Bend, Oregon, at Aspen Trading Group, a research and trading firm. ``The lack of downward momentum in yen crosses suggests we are in a transitional phase from higher volatility to relatively low volatility.'' The yen fell 0.9 percent to 136.14 against the euro at 4:05 p.m. in New York, from 134.96 on Oct. 10, and gained 0.4 percent from yesterday. The yen dropped 0.8 percent to 101.44 against the dollar this week from 100.67 and gained 0.1 percent today. The euro was little changed at $1.3415 for the week and increased 0.3 percent for the day. South Korea's won rose 2.9 percent to 1,333.90 per dollar, following a 9.8 percent decline yesterday. The Bank of Korea said it will trade directly with banks in the swaps market to help boost foreign-currency liquidity. The won is down 2 percent against the dollar this week. U.S. Stock Rally The Standard & Poor's 500 Index rose 4.6 percent this week after three weeks of decline as billionaire investor Warren Buffett, writing today in the New York Times, said he's buying U.S. stocks. The S&P 500 was down 0.6 percent for the day. Efforts of finance ministers and central banks worldwide may soon begin to restore investor confidence, said billionaire Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co., in an interview on Bloomberg Radio. The cost of borrowing dollars in London fell this week as global central banks pumped unprecedented amounts of cash into money markets while governments backed loans. The London interbank offered rate, or Libor, for three- month loans in dollars dropped for a fifth day, sliding 8 basis points, or 0.08 percentage point, to 4.42 percent, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points today to 1.67 percent, the lowest level since September 2004, and was down 80 basis points this week. Yen vs. Aussie Japan's currency fell 7.8 percent this week to 70.23 against the Aussie and 9.3 percent to 47.96 versus the real on speculation investors will resume trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target rate compares with 6 percent in Australia and 13.75 percent in Brazil. Implied volatility in one-month dollar-yen options fell to 20.3 percent, from 29.6 percent a week earlier, indicating traders see less price fluctuation in the coming month. Reduced volatility tends to work in favor of carry trades by making profit from bets on interest-rate differences more predictable. In the past month, the yen has gained 16 percent versus the real and 18 percent against the Aussie as the logjam in credit encouraged the unwinding of carry trades. ``I am not quite sure if we're getting a reversal in sentiment, but in the short term, the yen crosses move more quickly when they shoot up than when they come down,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. Housing Slowdown Construction of single-family homes in the U.S. dropped 12 percent last month to a 26-year low, the Commerce Department said today in Washington. The Reuters/University of Michigan preliminary estimate of October consumer sentiment fell to 57.5 this month from 70.3 at the end of September. The drop was the biggest on record. The yen may appreciate to 100 per dollar ``easily,'' as the U.S. economy falls into a recession, according to Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. ``If you look at the state of the economy and corporate America, we are going to be in a fairly tough situation for quite some time,'' he said. ``The dollar will be under pressure mainly against the yen. The yen will be the strongest currency going forward.'' 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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