By Ye Xie and Michael Moore Nov. 3 (Bloomberg) -- The yen fell against the euro on speculation a drop in interbank borrowing costs will encourage investors to step up purchases of higher-yielding assets financed by low-cost loans in Japan's currency. South Korea's won and India's rupee gained after South Korea announced a $10.8 billion fiscal stimulus and India's central bank cut borrowing costs for the second time in two weeks to support the economy. The dollar declined against the euro for the first time in three days as evidence of increased bank lending reduced demand for the greenback as a haven. ``We are moving out of the credit crunch, and we're seeing some normalization of market conditions,'' said Sebastian Galy, a currency strategist at BNP Paribas Securities SA in New York. ``In coming days, we could see risk premiums falling. Low- yielding currencies, such as the yen and the dollar, are under pressure.'' The yen dropped 0.3 percent to 125.69 per euro at 10:27 a.m. in New York, from 125.30 on Oct. 31. Japan's currency traded at 98.46 per dollar, compared with 98.46. The dollar weakened 0.3 percent to $1.2765 per euro from $1.2726. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in U.S. currency slid 0.17 percentage point to 2.86 percent today, the lowest level since the failure of Lehman Brothers Holdings Inc. on Sept. 15, data from the British Bankers' Association showed. Stronger Won South Korea's won rose 2.2 percent to 1,262 per dollar today 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. Goldman Sachs Group Inc. said last week that the won, Asia's biggest decliner against the dollar this year, with a 26 percent drop, may gain 10 percent in the next six months. India's rupee advanced the most in a month on speculation the central bank's inter-meeting interest-rate cut over the weekend will support growth in Asia's third-largest economy. The currency gained 1.7 percent to 48.6462 per dollar after the Reserve Bank cut the repurchase rate on Nov. 1 by a half- percentage point to 7.5 percent and freed up funds by lowering the amount banks must set aside to cover deposits. The yen fell 0.8 percent to 66.29 against the Australian dollar and 1 percent to 57.91 versus the New Zealand dollar as the loosening of credit markets encouraged investors to resume carry trades, in which they get funds in countries with low borrowing costs and buy higher-yielding assets elsewhere. Japan's Rate Japan lowered its benchmark lending rate last week by 0.2 percentage point to 0.3 percent, which compares with the 6.5 percent cash target in New Zealand. The Reserve Bank of Australia will cut its key rate tomorrow by a half-percentage point to 5.5 percent, according to the median forecast of 16 economists surveyed by Bloomberg News. Volatility implied by one-month euro options against Japan's currency fell to 42.06 percent, from 43.93 percent on Oct. 31, signaling reduced risk of exchange-rate fluctuations that make carry trades profits harder to predict. Volatility was 49.62 percent on Oct. 27, the highest level since the common European currency's debut in 1999. The U.S. currency dropped 1.7 percent to C$1.1911 against the Canadian dollar and 1 percent to 7.6919 Swedish krona as thawing credit markets reduced demand for safety. ``The dollar and the yen look like they're mirroring the improvement we're seeing in financial market conditions today,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. ``The correlation or at least the linkage between improving financial market conditions and dollar weakness and yen weakness is quite strong right now.'' Yen Versus Aussie The yen has appreciated 28 percent against the Aussie, 20 percent versus the New Zealand dollar, 18 percent against the euro and 6 percent versus the greenback since Lehman's collapse as frozen credit markets and a rout in stocks wiping out more than $13 trillion of market value discouraged carry trades. The yen reached 55.13 against the Aussie on Oct. 24, the strongest level since the Aussie started trading freely in 1983. 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,'' wrote Geoff Kendrick, a senior currency strategist in London at UBS, in a research note today. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Michael Moore in New York at mmoore55@bloomberg.net

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