May 21 (Bloomberg) -- The dollar traded near the lowest level versus the euro since January as falling currency and stock volatility and signs of thawing credit markets spurred speculation investors will seek higher-yielding assets.

The U.S. currency extended its decline yesterday after minutes of the Federal Reserve’s April meeting indicated some policy makers thought the central bank might need to boost its purchases of assets to support growth, renewing concern it may flood the market with greenbacks. Canada’s dollar gained as crude oil prices rose above $62 a barrel, encouraging demand for currencies of commodity producers.

“It’s a reflection of more risk taking,” said Laurent Desbois, president in Montreal of Fjord Capital, a currency fund with $800 million under management. “Capital is leaving the U.S. This will continue for a while.”

The dollar traded at $1.3780 at 6:02 a.m. in Tokyo, after dropping 1.1 percent and touching $1.3830, the weakest level since Jan. 5. The U.S. currency was at 94.92 yen after falling 1.1 percent. The euro was little changed at 130.76 yen.

South Africa’s rand and Brazil’s real were among emerging- market currencies gaining against the dollar on increased demand for assets in developing countries. The rand rose 1.3 percent to 8.3418 while the real advanced as much as 1.4 percent to 2.0125, the strongest level since Oct. 3.

The Dollar Index, used by Intercontinental Exchange Inc. to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped as much as 1.5 percent to 80.91, the lowest level since Dec. 31, on reduced demand for safety.

Fed Minutes

Some Fed policy makers said “a further increase” in the total amount of asset purchases might be needed to speed a U.S. economic recovery, while all agreed to hold off on such a move, minutes of the April 28-29 meeting show.

Treasuries rose yesterday, pushing the 10-year note’s yield down to 3.18 percent, and U.S. stocks erased gains.

“The rate of return is declining -- the 10-year yield is coming off, stocks are coming off -- and that’s bad for the dollar,” said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut.

The greenback dropped a record 3.4 percent versus the euro on March 18, when the Fed announced its plan to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy, a measure known as quantitative easing.

Taking Out ‘Stops’

The U.S. currency extended its decline earlier after taking out “stops” at $1.3739, a level last reached the day after the Fed’s announcement in March, said Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. Traders place stops, or pre-set orders to buy or sell a security, to protect their positions in case a trade goes against them.

Implied volatility on major currencies, which reflects investors’ expectations of currency swings, fell to 13.96 percent yesterday, from 14.56 a week earlier, according to data compiled by JPMorgan Chase & Co. The gauge was at 17.22 percent at the end of March. A drop in volatility tends to signal less demand for options to protect investors from currency swings.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, and Europe’s VStoxx Index both retreated to their lowest levels since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history.

The London interbank offered rate, or Libor, for three- month dollar loans decreased 0.04 percentage point to 0.72 percent, bringing its drop over the past four days to almost 0.14 percentage point, according to the British Bankers’ Association. The rate was 1.43 percent at the end of 2008.

Canada’s Currency

Canada’s dollar advanced as much as 1.7 percent to C$1.1364 per U.S. dollar, the strongest level since Oct. 14, as crude oil for July delivery rose as much as 4.4 percent to $62.26 a barrel on the New York Mercantile Exchange. Raw materials such as crude and gold make up more than half of Canada’s export revenue.

ICE’s Dollar Index and crude oil have a correlation of minus 0.61 in the past two months, compared with minus 0.26 since the start of the year, based on percentage moves, according to data compiled by Bloomberg News. A reading of 1 indicates the two are in lockstep, while minus 1 indicates they always go in an opposite direction.

Sterling advanced as much as 2 percent to $1.5794, the highest level since Nov. 10, as lower Libor rates signaled credit markets are thawing.

“The bears are throwing in the towel,” said Paresh Upadhyaya, a senior vice president at Putnam Investments LLC in Boston, who helped manage $21 billion in currency assets as of the end of March. “There’s still a lot of money -- whether it’s in money markets or somewhat defensive positions in portfolios -- that is just waiting for pullbacks to either reduce their defensive holdings or now start to look to go long.”

Upadhyaya said he bought the Australian dollar and the Norwegian krone.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net

Last Updated: May 20, 2009 17:05 EDT