Aug. 18 (Bloomberg) -- The euro rose for the first time in three days against the yen and dollar as German investor confidence jumped to the highest level in more than three years, adding to evidence a global economic recovery is taking shape.

The pound increased from near a one-month low versus the dollar after a report showed the U.K. inflation rate was higher in July than economists forecast as the nation’s recession eased. The dollar and yen declined against major counterparts including the South African rand as stocks and commodities advanced, reducing demand for relative safety.

“Economic growth looks better, and capital flows into commodity-sensitive currencies,” said Warren Naphtal, who oversees $870 million in assets as the chief investment officer at P/E Investments in Weston, Massachusetts. “For the flight- to-quality trade to be taken to the next level, you really need very negative news.”

Europe’s currency increased 0.6 percent to 133.86 yen at 4:25 p.m. in New York, from 133.08 yesterday. The euro appreciated 0.3 percent to $1.4127 after touching $1.4046 yesterday, the lowest level since July 30. The yen weakened 0.3 percent to 94.74 per dollar, from 94.50 yesterday, when it reached 94.21, the strongest level since July 29.

The Mannheim-based ZEW Center for European Economic Research said its index of investor and analyst expectations for Germany increased this month to 56.1 from 39.5 in July. The median forecast of 35 economists in a Bloomberg News survey was for the index to rise to 45.

Germany’s Growth

Germany’s economy grew 0.3 percent in the second quarter, bringing a halt to the worst recession since World War II sooner than forecasters expected, a report showed last week.

“Recent data shows Europe can benefit from the global economic recovery,” said Marcus Hettinger, a foreign-exchange strategist in Zurich at Credit Suisse Group AG, Switzerland’s largest bank by market value. The common currency may advance to $1.50 in three months, Hettinger said.

The dollar dropped 1.7 percent to 8.0249 rand and the yen weakened 2.4 percent to 51.48 against the Brazilian real on speculation the gain in stocks and commodities will encourage investors to increase holdings of higher-yielding assets. Japan’s benchmark lending rate of 0.1 percent and the U.S. target of zero to 0.25 percent compare with 8.75 percent in Brazil and 7 percent in South Africa.

The Standard & Poor’s 500 Index rose 1 percent, crude oil for September delivery increased 3.9 percent to $69.36 a barrel, and gold futures for December delivery gained 0.4 percent to $939.50 per ounce.

Economic Prospects

Stocks and commodities plunged yesterday on speculation that a rally in higher-yielding assets had outpaced the prospects for economic growth, helping to push the U.S. and Japanese currencies higher.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, fell 0.5 percent to 79.038. The gauge lost 2.9 percent this year after rising 6 percent in 2008.

A weaker U.S. currency would boost exports and help the economy shift away from its reliance on consumer spending for growth, said Richard Clarida, a strategic adviser in New York at Pacific Investment Management Co., the world’s largest bond fund manager, in an interview on Bloomberg Radio.

The economy won’t experience “robust growth” during the next three to five years as it makes a “really hard” shift from a consumption-led economy to an investment-led one, Clarida said. Consumer spending makes up 70 percent of the U.S. economy.

U.S. Housing

The dollar pared its gain versus the yen today after the Commerce Department reported that U.S. housing starts unexpectedly declined to an annual rate of 581,000 last month from a revised 587,000 pace in June. The median forecast of 70 economists surveyed by Bloomberg News was for an increase to 599,000 from a previously reported 582,000. Construction of single-family houses, which account for 75 percent of the industry, rose 1.7 percent to a 490,000 rate.

“We’ve been used to a bit more positive surprises on the housing front,” said Brian Kim, currency strategist at UBS AG in Stamford, Connecticut. “It’s an environment where people are still skittish, and the summer liquidity just causes more knee- jerk reactions than usual.”

Sterling advanced 1.4 percent to $1.6568 after a U.K. Office for National Statistics report showed the inflation rate unexpectedly held at 1.8 percent in July, exceeding the median forecast of 1.5 percent. The rate will probably drop below 1 percent later this year and may miss the central bank’s goal in three years, Bank of England projections show.

Pound Versus Dollar

The pound dropped to $1.6276 yesterday, the lowest level since July 17. Today’s advance helped sterling reduce its decline since Aug. 5 to 2.7 percent. Against the euro, the pound rose 1 percent to 85.32 pence today.

The central bank last week kept its main rate at a record low of 0.5 percent and increased its asset-purchase program by 50 billion pounds ($84 billion) to 175 billion pounds.

“We expect the BOE to tighten in February,” said Steven Englander, chief U.S. currency strategist at Barclays Capital in New York. “Inflation will be higher in the next three to six months. We think the pound will appreciate.” The pound will rise to $1.86 by year-end, according to Barclays.

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: August 18, 2009 16:28 EDT