Feb. 28 (Bloomberg) -- Volatility on yen options climbed to the highest in almost two weeks after investors exited bets Japan's currency would decline.

The yen surged against major currencies, including rallies of more than 2 percent versus the New Zealand dollar and South African rand, after International Monetary Fund Managing Director Rodrigo de Rato said carry trades, where investors borrow in Japan to buy higher-yielding assets, may cause ``exchange-rate misalignments'' and worsen global imbalances.

``Implied volatility on options is reacting to the move in the spot market,'' said Michael Holmes, a currency options trader in London at Australia & New Zealand Banking Group Ltd. ``It's the unwinding of the carry trade.''

Volatility on one-week dollar-yen options jumped to 9.75 percent, from 6.8 percent yesterday, the highest since Feb. 15 and the biggest jump in more than a month. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of setting option prices.

Implied volatility on one-week Australian dollar-yen options also climbed to 10.27 percent, the highest since Feb. 1.

The yen traded at 118.60 per U.S. dollar at 10:15 a.m. in Tokyo. It rose 2.3 percent yesterday, the biggest gain since July 2005. Japan's currency yesterday also surged 3.7 percent against the New Zealand dollar, 3 percent versus the Australian dollar and 4.7 percent versus the rand.

Volatility Watch

Japan's benchmark lending rate is 0.5 percent, compared with 5.25 percent in the U.S., 6.25 percent in Australia, 7.25 percent in New Zealand and 9 percent in South Africa.

``If dollar-yen moves below the 118 level, I'd expect one- month implied volatility to rise to 8.5 percent,'' said Holmes. ``If the Australian dollar weakens by another 1 percent versus the yen, I'd expect one-month implied volatility to rise by about 0.5 percentage point.''

Investors trimmed carry trade bets in part after Chinese stocks tumbled the most in 10 years, spurring declines in global equity markets and currencies.

``The foreign-exchange market is behaving in a more risk- averse fashion,'' said Daniel Katzive, a currency strategist at UBS AG in Stamford, Connecticut.

To contact the reporter on this story: Liz McCormick in New York at Emccormick7@bloomberg.net

Last Updated: February 27, 2007 20:25 EST