June 27 (Bloomberg) -- The yen rebounded from a record low against the euro and rose versus the dollar as a decline in stock markets around the world reduced demand for higher- yielding assets funded in Japan.

The yen also erased a weekly decline against the euro after European Central Bank council member Miguel Angel Fernandez Ordonez said an interest-rate increase next month ``is not certain'' and the European Commission reported a drop in confidence among European executives and consumers this month. The Swiss franc headed for weekly gains against the dollar and euro. The U.K.'s pound dropped after the economy grew less than previously estimated in the first quarter.

``We're finally seeing some catch-up in terms of the rising risk aversion in other markets feeding into currencies,'' said Adam Cole, global head of currency strategy in London at Royal Bank of Canada, the nation's largest lender. ``That's leading to strengthening in the safe-haven currencies and the yen has been the main beneficiary so far.''

Japan's currency gained as much as 0.6 percent, its biggest advance since June 16, to 167.23 per euro and was at 167.51 as of 6:26 a.m. in New York, from 168.30 yesterday, when it touched a record low of 169.46. It rose to 106.30 against the dollar, from 106.81. The euro was little changed at $1.5759, from $1.5757 yesterday and $1.5606 a week ago.

The Japanese currency may rise to 105 to the dollar and 166.9 per euro in the next week, Cole said.

The MSCI World Index of stocks dropped for a second day, losing 0.4 percent, while Europe's Dow Jones Stoxx 600 Index lost 0.7 percent. The Dow Jones Industrial Average plunged more than 3 percent yesterday amid concern rising oil prices and credit-market writedowns will curb company profits.

Yen Versus Real

The yen gained 0.4 percent versus the Brazilian real, a favorite of so-called carry trades, where investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that exchange rate changes will wipe out the returns.

The yen traded at 66.36 per real, heading for its first weekly gain in three. It rose for a second day against the South African rand, trading at 13.39 yen, from 13.42 yesterday.

Ordonez, who is also governor of the Bank of Spain, told reporters in Rome today that an interest-rate increase by the ECB next week ``is not certain, but possible.'' The Frankfurt- based central bank has ``said nothing beyond July,'' he added.

``The market is positioned for a series of rate increases and the ECB is trying to talk down expectations further along the curve,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the largest French bank. ``The euro will come under pressure as rate expectations are adjusted.'' The euro may fall to $1.5285 in two weeks, Stannard said.

Sentiment Index

An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005, from 97.6 the previous month, the European Commission in Brussels said today. Economists forecast it would fall to 96.5 from an initially reported 97.1, based on the median of 16 estimates in a Bloomberg News survey.

The euro has declined 0.1 percent against the dollar this quarter as traders bet the economic slowdown sparked by the collapse of the subprime-mortgage market will spread to Europe as the U.S. recovers.

Investors reduced wagers on additional rate increases by the ECB this year, futures contracts showed. The implied yield on the December Euribor futures contract dropped 14 basis points this week to 5.16 percent. It has declined from 5.47 percent on June 9, when ECB President Jean-Claude Trichet said rates my rise by a ``small amount.''

Quarterly Loss

The yen headed for a quarterly loss versus the dollar as Japanese workers prepared to invest their summer bonuses abroad. Employees at private Japanese companies may get bonuses of 14.8 trillion yen in June and July, Mitsubishi UFJ Research and Consulting Co. estimates.

``There's a desire among Japanese investors to place money in foreign-denominated assets,'' said Derek Halpenny, head of currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest bank by market value. ``The yield differential has been driving outflows.''

The amount of bonuses paid to Japanese workers twice a year can influence currency markets as individuals often send the funds abroad to seek higher interest than they can get in yen. Summer bonuses are paid in June and July, while winter payments are mostly made in December.

Japan's finance companies are seeking to raise more than 1 trillion yen ($9.34 billion) for funds investing abroad today and June 30, according to data compiled by Bloomberg. T&D Asset Management Co. will seek to raise 500 billion yen for a fund focused on Chinese environment-related business today.

BOJ's `Vigilance'

The yen fell earlier as a government report showed Japanese core consumer prices rose 1.5 percent in May from a year earlier, the fastest pace in a decade, and a separate report showed household spending fell a third month.

``The BOJ will elevate a sense of vigilance against inflation,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp. ``But with the economy slowing, the central bank cannot raise interest rates any time soon. We expect the BOJ to wait to increase rates until April.''

The yen may fall to 108 a dollar by the end of September, Tokyo-based Fujii said.

The Bank of Japan will keep its target lending rate at 0.5 percent through September 2009, a Bloomberg News survey of economists showed. Benchmark rates are 7.25 percent in Australia, 12 percent in South Africa and 12.25 percent in Brazil.

Franc, Pound

The Swiss franc rose as much as 0.7 percent to 1.0167 per dollar, the highest level since June 9, and was at 1.0200. It rose for a fourth consecutive day to 1.6072 against the euro.

The British pound headed for a fourth quarterly decline versus the euro as a government report showed U.K. gross domestic product rose the least in three years in the three months through March, prompting traders to reduce bets that the Bank of England will raise interest rates.

The U.K. currency fell as much as 0.3 percent to 79.47 pence per euro, and was at 79.28, from 79.22 pence late yesterday, taking its decline since the end of March to 0.4 percent. It was at $1.9876, from $1.9890.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: June 27, 2008 07:04 EDT