By Ye Xie and Lukanyo Mnyanda Oct. 31 (Bloomberg) -- The yen and the dollar rose against the euro and headed for record monthly gains as signs of a global recession led investors to take refuge. Japan's currency also advanced after the Bank of Japan lowered the target lending rate by 0.2 percentage point to 0.3 percent. The euro fell as inflation in the 15 nations that share the currency slowed to the lowest since January, making it easier for the European Central Bank to lower borrowing costs. ``There's decent dollar repatriation, and you cannot fight the flows,'' said Steven Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada's third-biggest bank. ``I cannot remember any time that we had so much volatility and illiquidity.'' The yen climbed 2.2 percent to 124.49 per euro at 8:34 a.m. in New York, from 127.31 yesterday. The yen increased 0.9 percent to 97.74 against the dollar from 98.61. The dollar rose 1.4 percent to $1.2743 versus the euro from $1.2915. Japan's currency has risen 17 percent against the euro in October, the biggest monthly gain since the European currency's introduction in 1999. The dollar has increased a record 10.6 percent versus the euro. The greenback is down 7.8 percent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed. Against the Australian dollar, the yen advanced 4.8 percent to 64.24, heading for a 31 percent gain this month. It also rose 3.1 percent to 56.63 versus the New Zealand dollar, and is up 25.6 percent in October. Carry Trades The Japanese currency is popular in carry trades, in which purchases of higher-yielding assets are funded in nations with lower rates. The BOJ lowered its benchmark rate from 0.5 percent today. Key borrowing costs are 6 percent in Australia and 6.5 percent in New Zealand. BOJ Governor Masaaki Shirakawa told a press briefing that the Japanese economy had clearly worsened this month and that three dissenters had wanted a quarter-point cut. One favored no reduction and four voted for the move. ``The reluctance of the BoJ to join the more aggressive moves of the Fed has hit risk appetite,'' analysts led by Hans- Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, wrote in a client note. The move suggests the Japanese central bank ``is nowhere near ready to introduce quantitative easing steps.'' Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, fell to 31.75 percent today from 35.38 percent at the end of last week. It reached 41.79 percent on Oct. 24, the highest since Bloomberg began compiling data in December 1995. Weaker Pound The pound weakened 1.7 percent to $1.6165 after London- based researcher GfK NOP Ltd. said U.K. consumer confidence in October fell toward the lowest since at least 1974. It has dropped 9.2 percent this month, the biggest since investor George Soros drove sterling out of Europe's system of linked exchange rates in 1992. The Bank of England will lower benchmark rates by a half- point to 4 percent when it announces its next decision on Nov. 6, according to a Bloomberg survey of 30 economists. ``We remain concerned about the British pound given the deteriorating economic outlook in the U.K., and recent signals from the BOE suggest scope for more aggressive easing than previously,'' wrote New York-based Sophia Drossos, a strategist at Morgan Stanley in a research note yesterday. The Federal Reserve reduced the target lending rate by a half-percentage point to 1 percent on Oct. 29, the lowest since June 2004 and matching the level during the Eisenhower administration in the late 1950s. Central banks in China, Taiwan, Hong Kong and the Middle East also cut borrowing costs this week as policy makers race to avert a global recession. The euro stayed lower as inflation in the countries sharing the currency eased to 3.2 percent in October from 3.6 percent the month before, matching the median of 27 economists in a Bloomberg News survey. ECB Rate The ECB participated in a coordinated interest-rate reduction by global central banks on Oct. 8 to prevent the collapse of the global financial system, reducing its benchmark rate by half a point to 3.75 percent. Policy makers meet Nov. 6, when they will probably cut the region's main refinancing rate by half a percentage point to 3.25 percent, according to a Bloomberg survey of 26 economists. Spending by U.S. consumers dropped more than forecast in September, capping its weakest quarter in three decades and signaling the economy will continue to slump in coming months. The 0.3 percent decrease in purchases was the biggest in four years and followed no change in August, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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