Dec. 22 (Bloomberg) -- The yen fell to a six-week low against the dollar and declined versus the euro as concern eased that credit-market losses will deepen, boosting demand for higher-yielding assets funded by loans in Japan.

Japan's yen dropped this week against 14 of the 16 most actively traded currencies as U.S. consumer spending showed resilience and short-term borrowing costs fell. The dollar may extend gains next week against the euro and yen on a report forecast to show durable-goods orders rebounded, suggesting the economy is weathering the worst housing slump in 16 years.

``Conditions are falling into place for a weaker yen,'' said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo Bank. ``You are seeing some renewed interest in carry trades.''

The yen weakened against the dollar for a fourth straight week, falling 0.7 percent to 114.04 per dollar. It reached 114.21 per dollar yesterday, the weakest level since Nov. 7. Japan's currency fell 0.3 percent this week to 163.98 per euro. The dollar rose 0.4 percent to $1.4382 per euro for its second straight weekly gain.

The yen is heading for its eighth year of decline against the euro, having dropped 4.2 percent. The dollar has lost 8.8 percent against the euro and 4.4 percent versus the yen.

The pound dropped to a record low against the euro and traded below $2 for the first time since September as traders bet the Bank of England will lower its 5.5 percent target lending rate to shore up the British economy. The pound declined for a fourth week against the dollar, falling to $1.9824.

Canada's Dollar

Canada's dollar rose against all of the 16 major currencies after a report showed the economy grew more than forecast in October and retail sales increased. The currency increased 2.4 percent against the U.S. dollar, ending six weeks of losses.

Currencies in Brazil, New Zealand, Canada and Australia rose at least 2.3 percent against the yen this week as carry- trade investors resumed borrowing in Japan to buy higher-yielding assets elsewhere. In a carry trade, investors get funds in a country with low rates and buy higher-yielding assets. The risk is that currency moves erode profits.

The Bank of Japan held its benchmark lending rate unchanged this week at 0.5 percent, the lowest among industrial nations. It compares with 11.25 percent in Brazil, 11 percent in South Africa, 8.25 percent in New Zealand, 6.75 percent in Australia and 4.25 percent in Canada.

Central Banks

The yen extended its loss yesterday after the Federal Reserve and European Central Bank loaned $30 billion in 35-day funds through special auctions to ease a shortage in funding markets. The Fed said it will conduct biweekly emergency auctions of loans as ``long as necessary'' to restore faith in the money markets. The ECB injected a record $500 billion into the banking system Dec. 18.

``These are confidence boosters,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration. ``This helps high-yielders against the yen.''

The three-month euro interbank offered rate, or Euribor, dropped 2 basis points, or 0.02 percentage point, to 4.78 percent, the lowest since Nov. 28, the European Banking Federation said yesterday.

U.S. personal spending rose 1.1 percent in November, up from 0.4 percent a month earlier, the Commerce Department said yesterday in Washington. While the gain was the biggest in more than two years, it preceded reports by retailers that warned of a slump in purchases.

Durable Goods

Orders for durable goods probably increased 2 percent in November after a 0.4 percent drop a month earlier, according to the median forecast of 54 economists surveyed by Bloomberg News. The Commerce Department's report is due Dec. 27.

The dollar gained for a second straight week against the euro as accelerating inflation encouraged traders to reduce bets that the Fed will cut its target lending rate of 4.25 percent at its Jan. 30 meeting. The Fed's preferred measure of inflation increased 2.2 percent from November 2006, the biggest year-over- year gain since March.

Interest-rate futures on the Chicago Board of Trade yesterday indicated a 78 percent chance that policy makers will reduce borrowing costs by a quarter-percentage point, compared with 92 percent odds Dec. 20.

`Inflationary Pressure'

``Inflationary pressure means the Fed doesn't have much leeway to lower rates,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co.

The dollar has rebounded from a record low of $1.4967 per euro last month. The U.S. currency will strengthen to $1.40 per euro by the end of 2008, according to the median forecast of 44 economists surveyed by Bloomberg News.

The Chinese yuan rose for a second week, touching the highest since the dollar peg was ended in July 2005, on speculation the central bank will seek a stronger currency to curb inflation after raising interest rates to a nine-year high. The People's Bank of China said yesterday it will let the market play a bigger role in setting the exchange rate.

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

Last Updated: December 22, 2007 09:27 EST