Sept. 19 (Bloomberg) -- The dollar rose the most against the yen since April after the U.S. government announced a plan to rescue banks and revive financial markets.

The yen was headed for a weekly drop against the euro on speculation investors will resume carry trades after the U.S. Treasury and the Federal Reserve proposed cleaning up financial firms' balance sheets. Japan's currency dropped today the most against the Australian dollar since January 1974, while Brazil's real rallied on renewed demand for emerging-market assets.

``There's a good chance that these extraordinary measures the authorities are taking will gradually bring confidence back,'' said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs Group Inc. ``That makes it possible for risky currencies, such as the Australian dollar and some emerging-market currencies, to recover after a large setback.''

The dollar rose 1.7 percent to 107.25 yen at 4:02 p.m. in New York, from 105.44 yesterday. It was the biggest increase since April 1. The U.S. currency dropped 0.9 percent to $1.4477 per euro, from $1.4348 yesterday. The euro advanced 2.6 percent to 155.27 yen, from 151.28, after touching 155.34, the highest level since Sept. 8.

Treasury Secretary Henry Paulson told reporters today that the U.S. government will spend ``hundreds of billions of dollars'' to cleanse banks of troubled assets and halt an exodus of investors from money markets. Congressional leaders said they intend to pass legislation within days.

Covering Bets

Investors sold the U.S. dollar and bought back high- yielding currencies including the euro to cover their bets against them, said Scott Ainsbury, a portfolio manager who helps manage about $12 billion in currencies at New York-based currency trader FX Concepts Inc.

Brazil's real strengthened, increasing 3.5 percent to 1.8303 per dollar, after touching a one-year low of 1.9606 yesterday. Mexico's peso advanced 0.9 percent to 10.6532. Colombia's peso gained 6.3 percent to 2050.90 per dollar, the most since the currency started trading freely in 1992.

The ICE's Dollar Index, a gauge measuring the greenback against the currencies of six U.S. trading partners, fell 1.6 percent this week to 77.68.

The yield on the two-year U.S. Treasury note rose 47 basis points, or 0.47 percentage point, to 2.16 percent, the biggest increase since February 1985. The Standard & Poor's 500 Index climbed 4 percent, while Europe's Dow Jones Stoxx 600 Index surged 8.3 percent, the most since it was inaugurated in 1987.

Weaker Yen

The yen dropped 5.6 percent to 89.54 versus Australia's dollar and 3.6 percent to 73.86 against New Zealand's dollar on revived demand for trades in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 7 percent in Australia and 7.5 percent in New Zealand.

Japan's currency decreased 1.1 percent against the euro and advanced 0.8 percent versus the dollar this week. The U.S. currency slid 1.8 percent against the euro.

Eisuke Sakakibara, 67, a professor at Tokyo's Waseda University who was dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at Japan's Finance Ministry, said in an interview on Bloomberg Television that there's ``no quick fix'' for credit turmoil. He said the yen may gain to 100 per dollar this year.

Foreign central banks may reduce dollar reserves as the U.S. bailout causes the budget deficit to swell, according to John Brynjolfsson, chief investment officer of Armored Wolf LLC, a hedge fund in Aliso Viejo, California.

``I can't imagine they wouldn't be having high-level discussions about the appropriateness of dollar-concentrated reserve strategies going forward,'' said Brynjolfsson, who formerly managed $80 billion at Newport Beach, California-based Pacific Investment Management Co.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: September 19, 2008 16:08 EDT