Nov. 3 (Bloomberg) -- The yen fell against the dollar 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 euro and the pound dropped versus the dollar on speculation the European Central Bank and the Bank of England may lower interest rates this week.

``There is some risk appetite returning, which explains the weakness of the yen,'' said Stephen Malyon, co-head of currency strategy in Toronto at Scotia Capital Inc., a unit of Canada's third-largest bank. ``There has been a lot of negative news coming out of the euro zone, so it's not surprising to see the euro give back some of its gains.''

Japan's currency fell 0.6 percent to 99.08 per dollar at 4:01 p.m. in New York, from 98.46 on Oct. 31. The euro decreased 0.7 percent to $1.2640 from $1.2726. The yen traded at 125.23 per euro, compared with 125.30. The pound dropped 1.5 percent to $1.5836 from $1.6076.

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 2.3 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, 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 2.5 percent to 67.42 against the Australian dollar and 2.6 percent to 58.90 versus New Zealand's currency 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 main 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, which can make carry trades profits harder to predict. Volatility was 49.62 percent on Oct. 27, the highest level since the 15-nation euro's debut in 1999.

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.

ECB and BOE

The U.S. currency may gain further versus the euro and the pound on speculation the European Central Bank and the Bank of England will reduce borrowing costs this week, according to Jessica Hoversen, a foreign-exchange and fixed-income analyst in Chicago at brokerage firm MF Global Ltd.

The ECB and the BOE will lower their target lending rates by a half-percentage point to 3.25 percent and 4 percent, respectively, at policy meetings Nov. 6, according to the median forecasts of Bloomberg News surveys of economists. The countries using the euro 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.

``I'm still bullish on the dollar,'' Hoversen said. ``Credit market problems haven't fully represented themselves in the economies of England and the euro zone. Interest-rate erosion is putting pressure on these currencies.''

The ICE's Dollar Index, which tracks the greenback versus currencies of six major U.S. trading partners, rose 0.8percent to 86.35oday. It touched 87.88 on Oct. 28, the highest level since April 2006.

Dollar `Forced Up'

``The dollar has been forced up,'' said Jim Rogers, chairman of Singapore-based Rogers Holdings, who correctly predicted the start of the commodities rally in 1999, in an interview on Bloomberg Television. ``There's a period of forced liquidation. My plan is to get out of the dollar sometime in the next few months.''

Foreign-exchange markets may be ``distracted'' by tomorrow's U.S. presidential election, 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 J. Moore in New York at mmoore55@bloomberg.net

Last Updated: November 3, 2008 16:04 EST