By Ye Xie and Agnes Lovasz Oct. 20 (Bloomberg) -- The yen declined against the euro as global government efforts to revive lending between banks encouraged investors to buy higher-yielding assets funded by low-cost loans in Japan. Japan's currency dropped against the Australian dollar and Brazil's real as the rate banks charge for three-month dollar loans fell the most in nine months in London, stoking carry trades. The South Korean won strengthened versus the greenback after the government guaranteed $100 billion of lenders' foreign-currency debt to boost confidence. ``In terms of risk appetite, the market is definitely feeling better today,'' said Liz Bussanich, senior vice president of foreign exchange at BMO Capital Markets in New York. ``We look at the euro-yen as the risk indicator. It seems that we may have seen the worst for now.'' The yen declined 0.1 percent to 136.01 per euro at 9:15 a.m. in New York, from 136.21 on Oct. 17. Japan's currency traded at 101.49 per dollar, compared with 101.69. Against the euro, the dollar was little changed at $1.3405, compared with $1.3410. The pound rose 0.3 percent to $1.7327, from $1.7281. Japan's currency fell 0.7 percent to 70.57 against the Aussie and 1 percent to 48.2311 against the Brazilian real on speculation investors will resume trades in which they borrow in countries with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent, the lowest among major economies, compares with 6 percent in Australia and 13.75 in Brazil. Surging Ruble Russia's ruble surged against the dollar by the most in more than nine years and gained versus the euro after the central bank limited currency-swap positions. The managed currency climbed as much as 1.8 percent to 25.8838 per dollar, the biggest gain since May 1999. It advanced 0.1 percent to 30.3593 against the central bank's dollar-euro basket maintained by the Bank Rossii, the central bank. India's rupee fell as much as 0.3 percent to 49.0400 per dollar after the central bank unexpectedly cut its benchmark interest rate by 1 percentage point to 8 percent. It was the Reserve Bank of India's first rate cut since 2004. Emerging-market currencies tumbled after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, deepening a freeze in credit markets and prompting investors to turn to the safest, dollar-denominated securities. Zurich-based UBS AG predicts the rupee will weaken 2.2 percent to a record low of 50 per dollar by March, adding to a 19 percent drop this year, while the won will depreciate 6 percent to 1,400, extending a 29 percent slump. Won Gains The won rose 1.4 percent today to 1,315 per dollar after the Bank of Korea said it will provide $30 billion in U.S. dollars to banks to increase their access to funding. It slumped 9.7 percent on Oct. 16, the most since the International Monetary Fund bailed the nation out in 1997. The yen will weaken ``over the coming days as we continue to see a sharp improvement in interbank credit markets,'' wrote strategists led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, in a research note yesterday. ``The underlying credit picture has continued to improve.'' The London interbank offered rate, or Libor, for three- month loans in U.S. dollars slid 36 basis points, or 0.36 percentage point, to 4.06 percent today, the biggest drop since Jan. 23, according to the British Bankers' Association. The overnight-dollar rate lost 16 basis points to 1.51 percent, the lowest level in more than four years. Currency Volatility Japan's currency also fell as volatility implied by one- month dollar-yen options declined to 18.11 percent from 20.32 percent at the end of last week, indicating a smaller risk of exchange-rate fluctuations that may erode profits on carry trades. It reached 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995. The dollar declined versus the pound on speculation a U.S. housing slump and a seizure in credit markets will tip the world's largest economy into recession. Federal Reserve Chairman Ben S. Bernanke will testify at the House Budget Committee on the economic outlook and financial markets at 10 a.m. in Washington. A rebound in U.S. growth won't happen right away as the government tries to unfreeze credit markets, he said Oct. 15. Interest-rate futures show a 100 percent chance the Fed will lower its 1.5 percent target lending rate by at least a quarter-percentage point when the central bank announces its next policy decision Oct. 29. That compares with zero chance of a rate cut one month ago. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

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