By Agnes Lovasz Oct. 21 (Bloomberg) -- The yen rose against the dollar and the euro as U.S. stock futures fell and investors increased bets the Federal Reserve and European Central Bank will cut interest rates to limit the severity of the global economic slump. Japan's currency also gained against the Australian dollar after the Reserve Bank of Australia said it saw a ``strong economic case'' for its Oct. 7 interest-rate reduction, fueling expectations for another cut. The U.S. dollar rose to a year- and-a-half high against the euro after Fed Chairman Ben S. Bernanke called yesterday for government-stimulus measures to avert a prolonged recession. ``The story overnight is Bernanke talking about a new fiscal stimulus, which is dollar-positive,'' said Geoffrey Yu, a London-based currency strategist at UBS AG, the world's second- biggest currency trader. ``Today is all about caution. And if you want to be cautious, then you are long yen.'' The yen rose 2.2 percent to 132.92 per euro at 9:01 a.m. in New York, from 135.92 yesterday, in its third day of gains. The dollar climbed 1.4 percent to $1.3161 from $1.3344 after reaching $1.3154 per euro, the strongest level since March 2007. The yen advanced 1 percent to 100.88 per dollar from 101.86. Futures on the Standard & Poor's 500 Index expiring in December fell 1.3 percent, encouraging investors to reverse carry trades in which investors get funds in a country 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 and 7.5 percent in New Zealand. European Rates Against the Australian dollar, the yen rose to 69.48 from 71.76 late yesterday in New York. It also advanced to 61.85 per New Zealand dollar from 63.48. The euro dropped against the yen as investors bet the ECB will lower borrowing costs further after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8 as part of coordinated reductions by major central banks. The implied yield on the three-month Euribor contract expiring in March fell to 3.41 percent yesterday, the lowest level in seven months. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year. ``Concerns over a European economic downturn are intensifying,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``An ECB rate cut is possible. The euro is becoming a very weak currency.'' U.S. Measures The currency shared by 15 European countries fell to its lowest level against the dollar since March 2007 after ECB Executive Board member Juergen Stark said in an interview with Deutschlandfunk that he sees risks for one or two more ``accidents'' in financial markets. The dollar has gained 18 percent since touching a record low of $1.6038 per euro on July 15 on speculation the greenback will benefit as the European economy slows. U.S. lawmakers should consider ``measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee yesterday. The White House said it is ``open'' to the idea of a new plan, having previously withheld support for additions to a $168 billion package approved in February. ``The market has taken positively that there will be another stimulus package,'' said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank. ``Between the other packages and measures this is the next good thing to do. The general direction should be for the dollar to trend higher.'' Accelerated Gain The dollar's gain against the euro accelerated after stop losses on investors' long positions on the euro were activated when the $1.3260 level was broken, Praefcke said. A stop loss is an automatic order to buy or sell an asset should it reach a particular level. Praefcke expects the dollar to trade at $1.34 per euro at year-end and to strengthen to $1.25 by the end of 2009. That compares with a median estimate of $1.40 and $1.33 in a Bloomberg survey. Members of the Reserve Bank of Australia said inflation will slow at a faster rate than previously expected amid a global economic slowdown, according to minutes of their Oct. 7 meeting released today in Sydney. Forces are building that will ``start to dampen pressure on prices,'' Reserve Bank Governor Glenn Stevens said in a speech after the minutes were published. This month's reduction in the overnight cash rate by 1 percentage point to 6 percent was twice as much as economists forecast. `Nervous Markets' ``The headlines are sufficiently gloomy for nervous markets to knock the Aussie lower,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, referring to the currency by its nickname. ``The minutes reflect the extremely worrying conditions at the time, and obviously there's only been a degree of improvement.'' Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said yesterday it may lose as much as HK$15.5 billion ($2 billion) on unauthorized currency contracts that went sour as the Australian dollar declined. The currency plunged 28 percent since June 30 against the dollar, the most among the 16 most-active currencies. The Reserve Bank of New Zealand will reduce its benchmark rate by 1 percentage point to 6.5 percent when it announces a policy decision on Oct. 23, according to a Bloomberg News survey of 14 economists. The Bank of Canada is likely to cut his main lending rate by 50 basis points to a four-year low of 2 percent today, according to 13 of 24 economists surveyed by Bloomberg. To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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