By Lukanyo Mnyanda and Ron Harui Nov. 3 (Bloomberg) -- The yen fell against the dollar and the euro as a rally in Asian and European stocks encouraged investors to step up purchases of higher-yielding assets financed with the Japanese currency. The yen also weakened versus Australia's dollar on expectations the Reserve Bank of Australia will cut interest rates tomorrow to sustain economic growth. The Japanese currency slid against South Korea's won and India's rupee after Korea announced a $10.8 billion stimulus package and India's central bank cut borrowing costs for the second time in two weeks. The dollar declined against the euro before reports this week that may add to evidence U.S. economic is slowing. ``We're seeing a bit of risk appetite returning as things stabilize and I wouldn't be surprised to see the yen even lower,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the most accurate forecaster in a 2007 Bloomberg survey. ``We should see lower-yielding currencies coming under some more pressure.'' Japan's currency declined to 99.17 against the dollar as of 6:21 a.m. in New York, from 98.46 on Oct. 31. It dropped to 127.66 per euro, from 125.30. The dollar weakened to $1.2874 per euro from $1.2726, and was at $1.6197 versus the pound from $1.6076. The yen has appreciated 8.8 percent versus the greenback since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy. The remainder of the world's 16 most-active currencies declined as frozen credit markets and a rout in stocks that wiped out more than $13 trillion of market value fueled risk aversion. The yen may drop to 103 against the dollar in the next week, Stannard said. `Riskier Trades' The Japanese currency fell to 67.39 against the Australian dollar from 65.74 on Oct. 31. It reached 55.13 on Oct. 24, the strongest since Australia's currency started trading freely in 1983. The yen dropped to 12.70 versus the South Korean won and to 2.036 against the Indian rupee. The won rose 2.2 percent to 1,262 per dollar after Finance Minister Kang Man Soo said the government plans to spend an extra 14 trillion won ($10.8 billion) next year to help the economy. ``The riskier trades are a little bit better bid,'' said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. ``Some of the crosses are performing well'' against the yen, he said. The biggest rout in Asian currencies since the regional financial crisis of 1997 is tempting investors, drawn by the world's fastest economic growth and $4 trillion of reserves. Growth, Reserves Franklin Templeton Investments, which manages about $500 billion, favors the Malaysian ringgit and China's yuan. Sydbank A/S, Denmark's third-largest bank, is buying South Korean won, Indonesian rupiah and Indian rupee. Goldman Sachs Group Inc. said last week that the won, Asia's biggest decliner this year after falling 26 percent against the dollar, may gain 10 percent in the next six months. ``We have taken advantage of the recent broad-based weakness to increase our exposure to some Asian currencies,'' said Michael Hasenstab, manager of the $9.6 billion Templeton Global Bond Fund in San Mateo, California. ``The differential in growth between Asia and other regions should continue to attract capital, and growth may further benefit from initiatives of local governments that have significant resources to bolster domestic demand.'' The MSCI World Index rose for a fifth day, gaining 0.7 percent, while Europe's Dow Jones Stoxx 600 Index advanced 0.3 percent. Trading volumes in the foreign-exchange market may be lower than normal today because of a public holiday in Japan. Rate Cuts Economists forecast the Reserve Bank of Australia will cut its benchmark interest rate by a half-percentage point to 5.5 percent tomorrow, after policy makers in the U.S., Japan and China announced reductions last week. The Federal Reserve lowered its target rate to 1 percent last week, matching a half-century low, after a government report showed the U.S. economy contracted by the most since 2001 in the third quarter. Futures on the Chicago Board of Trade indicate a 56 percent probability the Fed will reduce the target rate to 0.5 percent at its Dec. 16 meeting. The odds a week ago were zero. Gains by the euro and pound may be muted on speculation the European Central Bank and the Bank of England will reduce their key interest rates by a half-percentage point to 3.25 percent and 4 percent, respectively, at policy meetings on Nov. 6, according to Bloomberg surveys of economists. The euro-area economy probably entered a recession in the third quarter and will grow 0.1 percent next year, the worst performance since 1993, the European Commission said today. Less Volatility The yen also weakened as volatility implied by one-month euro options against Japan's currency fell to 42.40 percent, from 43.93 percent on Oct. 31, signaling a reduced risk of exchange-rate fluctuations that make so-called carry trades unprofitable. Volatility was 49.62 percent Oct. 27, the highest level since the common European currency's debut in 1999. In carry trades, investors get funds from countries with low borrowing costs, such as Japan, where the benchmark interest rate is 0.3 percent, and invest the money in overseas markets where returns are higher. Japan's main interest rate compares with 3.75 percent in the 15 nations that share the euro and is the lowest among industrialized countries. The dollar fell for the first time in three days against the euro on speculation slowing growth in the world's largest economy will support the case for the Fed to cut interest rates. ISM The Institute for Supply Management's factory index, scheduled for release at 10 a.m. in New York, declined to 41.5 in October from 43.5 the previous month, according to economists surveyed by Bloomberg News. A reading of less than 50 signals contraction. A Labor Department report on Nov. 7 will probably show payrolls fell for a 10th straight month in October, a separate survey showed. ``I would expect another week of poor economic news that will reinforce the headwinds facing the global economy,'' said John Horner, a currency strategist at Deutsche Bank AG in Sydney. ``This is something that should weigh on the dollar'' against the yen in particular, he said. The foreign-exchange markets may be ``distracted'' by the U.S. presidential election tomorrow, according to UBS AG, the world's second-largest currency trader. Democratic presidential nominee Barack Obama holds a 54 percent to 43 percent lead among likely voters over Republican candidate John McCain in the presidential campaign, according to a Washington Post-ABC News tracking poll. ``With the result largely priced in, we are not expecting a significant impact on the currency markets,'' Geoff Kendrick, a senior currency strategist in London at UBS, wrote in a research note today. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

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