Aug. 1 (Bloomberg) -- The yen gained, after posting its biggest monthly advance in more than a year against the euro, on concern that losses from U.S. subprime mortgages will push investors to pare riskier investments funded by loans in Japan.

Traders pushed up the yen against all 16 major currencies tracked by Bloomberg yesterday as they reduced so-called carry trades after American Home Mortgage Investment Corp. said it may have to sell off assets. U.S. stocks slumped and a gauge of corporate bond risk increased, prompting investors to trim their appetite for higher-yielding assets.

``The news has spread jitters back into the market again,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``I don't think we are necessarily through these concerns. The smart money seems to be moving away from the carry trade.''

The yen traded at 161.91 per euro and 118.42 per dollar at 6:20 a.m. in Tokyo. The Japanese currency gained 0.6 percent yesterday against the euro and 0.4 percent versus the dollar. The yen advanced 2.7 percent last month versus the 13-nation currency, the most since February 2006, and 3.7 percent against the dollar, the biggest one-month increase since October 2004.

The Japanese currency also advanced 1.2 percent against the New Zealand dollar yesterday and 1 percent versus the Australian dollar, erasing earlier declines that resulted from a global stock rally.

``It is too early to say we are out of the woods,'' said Robert Fullem, vice president of U.S. corporate currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Concern about subprime and credit risks remain. The key right now is whether corporate earnings and growth is going to sustain the impact from the housing sector.''

Subprime Problems

U.S. stocks fell yesterday, erasing earlier gains, with banking shares dropping after American Home Mortgage Investment Corp. said it's unable to fund loans and may have to liquidate assets. MGIC Investment Corp. and Radian Group Inc. tumbled after the two home-loan insurers said their combined stakes of more than $1 billion in a subprime mortgage company may be worthless. Standard & Poor's said it may downgrade an additional $1 billion of collateralized debt obligations.

``A negative U.S. equity performance paves the way for an unsettled Asian equity session, which will carry on to Europe as well,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``A brief period of stabilization looks to have passed already. The yen may gain further in the short term.''

Credit-Default Swaps

Asian stocks trading in the U.S. fell yesterday after Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., Japan's top lenders, reported a drop in earnings. The Bank of New York Co.'s Asia ADR Index, tracking the region's American depositary receipts, slipped 1 percent to 166.26, finishing the month down 0.7 percent.

Credit-default swaps based on $10 million of bonds in the benchmark CDX North American Investment-Grade Index jumped $9,000 to about $81,000 after dropping earlier by as much as $9,000 to $63,000, according to Deutsche Bank AG.

The carry trade has weakened the yen against 12 of 16 major currencies this year as investors took advantage of Japan's 0.5 percent borrowing cost, the lowest among industrialized nations. The rate compares with 4 percent in the euro region, 5.25 percent in the U.S., 5.75 percent in the U.K., 6.25 percent in Australia and 8.25 percent in New Zealand.

The dollar strengthened against the euro yesterday, erasing earlier declines, as concern over credit risks pushed some investors to seek safety in the currency. U.S. Treasuries rose.

Consumer Confidence

The U.S. currency also benefited from a report that showed consumer confidence climbed more than forecast in July to the highest in almost six years.

The dollar traded at $1.3683 per euro. The U.S. currency strengthened 0.1 percent yesterday, rebounding from an intraday low of $1.3727. The U.S. currency dropped 1.1 percent against the 13-nation currency last month and 3.6 percent this year.

The U.S. currency last month dropped to a record low of $1.3852 against the euro and fell to $2.0654, the weakest since May 1981 versus the pound, on speculation losses from subprime mortgages will hurt corporate earnings and consumer spending, slowing U.S. growth.

U.S. employers probably added 130,000 jobs in July, down from 132,000 a month earlier, according to the median forecast of 83 economists surveyed by Bloomberg News. The jobless rate is forecast to stay at 4.5 percent. The payroll data is due from the Labor Department on Aug. 3.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: July 31, 2007 17:24 EDT