June 9 (Bloomberg) -- The euro rose from one-week low and the pound advanced against the dollar after a report said the U.K. housing market showed signs of “stabilizing” in May.

Australian’s dollar gained from near a one-week low on speculation signs of a global economic recovery will boost demand for commodities that the nation exports. The U.S. currency may rise against the yen after Nobel Prize-winning economist Paul Krugman said the U.S. economy will emerge from recession by September, sparking speculation the Federal Reserve will increase its target lending rate late this year.

The U.K.’s housing data “added to the confidence that the global economy is bottoming out,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “As optimism boosts risk appetite and demand for higher yields, lower-yielding currencies like the yen and dollar will come under pressure.”

The euro rose to $1.3914 per dollar as of 10:16 a.m. in Tokyo from $1.3900 yesterday in New York. The 16-nation currency climbed to 136.85 yen from 136.89 yen. The pound gained to $1.6056 from $1.6051. The yen traded at 98.36 per dollar from 98.49 yesterday.

Australia’s currency advanced 0.2 percent to 79.10 U.S. cents from 78.92 cents in New York yesterday. It slipped as low as 78.86 cents, near the weakest since May 28. New Zealand’s dollar gained 0.2 percent to 62.18 U.S. cents from 62.05 cents yesterday.

Higher Rates

The pound rose against 12 out of 16 most-active currencies after the Royal Institution of Chartered Surveyors said in a report today that the smallest balance of real-estate agents and surveyors in 18 months reported price declines. The number of respondents in the monthly survey saying home values fell exceeded those reporting increases by 44.1 percentage points, the best reading since November 2007, RICS said.

Sterling had its biggest weekly loss in three months last week as Prime Minister Gordon Brown reshuffled his Cabinet amid a series of resignations and calls for him to quit.

Losses in the dollar were tempered as investors raised bets the Federal Reserve will increase its target lending rate by the end of the year as the world’s largest economy recovers.

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” Krugman said in a lecture yesterday at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

More Confident

CME Group futures showed yesterday a 57 percent chance the Fed will increase the target rate for overnight lending between banks to at least 0.5 percent by its November meeting, compared with 26 percent odds a week ago. Investors raised bets the central bank will boost interest rates after the Labor Department said June 5 that U.S. payrolls fell by 345,000 last month, the smallest decrease in eight months.

“As Krugman signaled, people are becoming more confident about the prospects for the U.S. economy and interest rates there,” said Shoichi Handa, a senior currency dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “These positive perceptions will support capital flow back into dollar-denominated assets.”

Sales at U.S. retailers increased in May for the first time in three months as demand for cars picked up, according to a Bloomberg News survey before the government report on June 11. Retail sales climbed 0.5 percent, according to the median estimate of the survey.

Yield Premium

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, slipped 0.2 percent to 80.759 after yesterday rising as much as 1 percent to 81.466, the highest since May 20, on the outlook for the fed funds benchmark. The gauge increased 4 percent after touching this year’s low of 78.334 on June 2.

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ assets.

“Higher yields may hamper a recovery in profits at U.S. banks and cast doubt over the sustainability of a bull-run in U.S. equity markets,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. “If this happens, the dollar may come under renewed selling pressure” against the euro and the yen, he said.

The yield premium on 10-year Treasury notes over comparable-maturity German bunds reached 0.199 percentage point yesterday, the widest level since November.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

Last Updated: June 8, 2009 21:28 EDT