Nov. 24 (Bloomberg) -- The dollar weakened to the lowest level versus the yen in more than a month on concern the Federal Reserve will tolerate further declines in the U.S. currency, encouraging shifts to higher-yielding assets.

Japan’s currency gained against 15 of its 16 major counterparts and is set to post its first monthly increase versus the greenback since September. Dollar-funded investments in currencies such as the Brazilian real and South African rand performed better this month than similar strategies using yen loans, Bloomberg data show. Fed officials said in minutes today record-low interest rates might fuel “excessive” speculation.

“Once again the Fed is not showing any concern over weakness of U.S. dollar,” said JP Blais, vice president of foreign exchange in Toronto at Bank of Montreal, Canada’s fourth-largest. “If borrowing costs are going to be lower for longer, that might leverage people into buying more equities.”

The dollar fell 0.5 percent to 88.54 yen at 4:03 p.m. in New York from 88.97 yesterday, after touching 88.36, the lowest level since Oct. 9. The euro gained 0.02 percent to $1.4963 and slumped 0.5 percent to 132.48 yen.

Policy makers in the minutes from the Fed’s Nov. 4 meeting said the depreciation in the dollar was “orderly” and that any declines that push up inflation “would bear close watching.”

The pound fell against the euro on speculation the U.K. central bank will extend its asset purchase program after Bank of England Governor Mervyn King said the U.K. economy faces “profound challenges.” Sterling fell 0.2 percent to 90.28 pence per euro from 90.10 pence yesterday.

Mexican Peso

Japan’s yen gained against higher-yielding counterparts excluding the rand and Mexican peso as share prices globally slumped. The Standard & Poor’s 500 Index fell 0.05 percent and the MSCI World Index of shares slid 0.6 percent. Benchmark rates of 4.5 percent in Mexico and 7 percent in South Africa exceed Japan’s 0.1 percent overnight lending rate.

“The currency landscape is indicative of a risk aversion tone,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

Mexico’s peso gained against all major counterparts today after Pacific Investment Management Co. said the Latin American currency is one of the cheapest in emerging markets and may rise as much as 20 percent over the next year. Fitch Ratings cut Mexico’s foreign debt rating yesterday by one level to BBB.

‘Cheapest Currencies’

“The peso is one of the cheapest currencies in emerging markets,” said Guillermo Osses, who helps oversee about $50 billion in emerging-market assets at Pimco, manager of the world’s biggest bond fund. “External accounts will improve.”

The peso advanced 0.8 percent to 7.4499 per Brazilian real and 1.6 percent to 9.3459 versus the New Zealand dollar.

Osses predicts the peso will advance between 10 percent to 20 percent in one to two years as the U.S. economy recovers. He also said Pimco may add to its holdings of Mexican assets.

Fed policy makers agreed during this month’s meeting that the while chances of excessive risk-taking or rising inflation expectations were “relatively low, they would remain alert to these risks,” the minutes showed.

“There is something for everyone there,” said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co. “Dollar trends have generally been softer so in the context of that trend, the dollar decline would be the path of least resistance.”

Growth Revisions

The U.S. government’s revised figures for third-quarter gross domestic product showed the world’s largest economy expanded at a 2.8 percent annual rate, slower than the Commerce Department’s 3.5 percent estimate last month.

The U.S. central bank will probably have to keep rates close to zero until 2011, encouraging investors to send funds abroad to earn higher returns, according to JPMorgan Chase & Co. The dollar will weaken to $1.62 per euro in the second quarter next year, currency strategists led by John Normand in London wrote in the investment bank’s Global FX Outlook 2010 published before the minutes were released.

“Fed policy is a key driver because it determines the dollar’s attractiveness as a funding currency,” Normand said in an interview. “The dollar’s decline is more than a carry trade. Global investors’ preference for non-U.S. equities, rising merger and acquisition outflows from the U.S. and central-bank reserve diversification are compounding the dollar’s decline.”

Investors buying 10 currencies such as the Mexican peso, Brazilian real and South African rand that offer higher three- month deposit rates than the dollar would have earned 2.7 percent this month, according to data compiled by Bloomberg using U.S. borrowing costs. A similar trade funded in yen would have earned 0.8 percent, the data show.

In carry trades, investors borrow in one currency to invest in others that offer higher yields. Increasing price swings in foreign-exchange markets increase the risk of losses on such strategies by boosting the odds that the funding currency strengthens and makes it more expensive to repay the loan.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: November 24, 2009 16:05 EST