Nov. 22 (Bloomberg) -- The yen may extend its gains against the dollar and euro on concern widening credit-market losses will slow global economic growth, pushing investors to sell higher-yielding assets financed by borrowing in Japan.

The yen yesterday strengthened to the highest level in more than two years versus the dollar. Traders sold assets denominated in currencies from Australia, South Africa, New Zealand and Brazil to pay back yen-denominated loans as global stocks fell. The cost to borrow in dollars increased and the yield premium on emerging-market debt widened to the highest since 2005.

``The fear is pushing high-yielding currencies to the downside and the yen is benefiting,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``Negative news continues to flow out of the financial sector. People are really concerned that this isn't just an issue of a U.S. slowdown. It has a negative impact on global growth.''

The yen traded at 108.42 per dollar and 161.13 per euro at 7 a.m. in Tokyo. The Japanese currency touched 108.26 per dollar yesterday, the strongest level since June 2005. Japan's yen may rise to as high as 104 per dollar over the next couple of months if risk aversion continues, according to Yanagihara.

U.S. stock and bond markets are closed today for the Thanksgiving holiday. The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time tomorrow.

The dollar traded at $1.4858 per euro. The U.S. currency dropped to a record low of $1.4870 per euro and 1.1016 versus the Swiss franc yesterday on speculation the Federal Reserve will cut interest rates for a third time this year in December to prevent the economy from falling into a recession.

Dollar Weakness

The dollar has declined 11.2 percent this year against the euro as the Fed's two rate cuts since September to 4.5 percent reduced the allure of U.S. assets. The U.S. Dollar Index traded on ICE Futures U.S. in New York touched a record low of 74.944 yesterday, the weakest since the gauge started trading in 1973.

The odds of the Fed cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 were 90 percent yesterday, up from 72 percent a month ago, futures contracts traded on the Chicago Board of Trade show.

Reports yesterday showed the Reuters/University of Michigan's final consumer sentiment index for November fell to 76.1, while the New York-based Conference Board's index of leading U.S. economic indicators decreased 0.5 percent in October.

The yield advantage of U.S. two-year Treasuries over comparable-maturity Japanese government debt shrank to 2.27 percentage points yesterday, the narrowest since 2004, making U.S. assets less attractive to international investors. The two- year German bund widened its yield advantage over comparable- maturity Treasuries to 0.65 percentage point, the widest since 2004.

Yen Gains

The yen gained against all 16 most-actively traded currencies yesterday as investors unwound the carry trades. Australia's dollar declined 3.8 percent, extending this month's decline to 12.5 percent. New Zealand's dollar weakened 3.2 percent while South Africa's rand lost 3.4 percent.

In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell high-yielding assets and buy yen to repay borrowings.

The benchmark interest rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent while Switzerland's is 2.75 percent.

`People Are Worried'

``People are worried about a slowdown in global growth and they are running away from risky assets, giving a boost to the yen's strength,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of MF Global Ltd., the world's largest broker of exchange-traded futures and options contacts. ``The fear is that we may see a few more shoes drop.''

The cost of borrowing in dollars for three months rose to the highest in four weeks yesterday, said the British Bankers' Association. U.S., European and Asian stocks sank. The Standard & Poor's 500 Index fell 1.6 percent, erasing its gain this year.

The spread, or extra yield, investors demand to own emerging-market dollar bonds instead of Treasuries widened to 2.6 percentage points yesterday, the most since 2005, according to JPMorgan Chase & Co.'s EMBI Plus index.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: November 21, 2007 17:06 EST