Oct. 31 (Bloomberg) -- The yen and the dollar rose, heading for record monthly gains against the euro, as signs of a global recession prompted investors to sell higher-yielding currencies.

Japan's currency also advanced after the Bank of Japan lowered interest rates by 20 basis points to 0.3 percent, compared with forecasts for a cut to 0.25 percent. The euro fell as the European Union statistics office in Luxembourg today said inflation in the 15 nations that share the currency slowed to the lowest since January, giving the European Central Bank more room to lower rates.

``Investors are still fairly risk averse and very nervous,'' said Adam Cole, head of global currency strategy in - London at RBC Capital Markets. ``Risk aversion has been the key driver for the currency markets.''

The yen climbed to 124.50 per euro as of 7:04 a.m. in New York from 127.31 yesterday. Against the dollar, it was at 97.58 from 98.61. The Japanese currency may trade at 95 to the dollar in the next week, Cole said. The dollar rose 1.3 percent versus the euro to $1.2743.

The yen has risen 17 percent against the euro in October, heading for it biggest monthly gain since the European currency's introduction in 1999. The dollar has gained 10.6 percent versus the euro in the month. The greenback is down 9 percent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed.

The pound weakened to $1.6203 from $1.6451. Against the Australian dollar, the yen advanced to 64.24 from 67.27. It also rose to 56.27 versus the New Zealand dollar from 58.35.

Global Slump

U.K. consumer confidence in October fell toward the lowest since at least 1974, London-based researcher GfK NOP Ltd. said today. The U.S. economy shrank in the third quarter by the most since 2001, data showed yesterday.

The Federal Reserve reduced the target lending rate by a half-percentage point to 1 percent on Oct. 29, the lowest since June 2004 and matching the level during the Eisenhower administration in the late 1950s. Central banks in China, Taiwan, Hong Kong and the Middle East also cut borrowing costs this week as policy makers race to avert a global recession.

The ECB participated in a coordinated interest-rate reduction by global central banks on Oct. 8 to prevent the collapse of the global financial system, reducing its benchmark rate by half a point to 3.75 percent.

Policy makers meet Nov. 6, when they will probably cut the region's main refinancing rate by half a percentage point to 3.25 percent, according to a Bloomberg survey of 26 economists.

Euro, Yen

The euro stayed lower as inflation in the countries sharing the currency eased to 3.2 percent in October from 3.6 percent the month before, matching the median of 27 economists in a Bloomberg News survey

The yen remained higher after the BOJ lowered its benchmark rate to 0.3 percent from 0.5 percent,

``The reluctance of the BoJ to join the more aggressive moves of the Fed has hit risk appetite,'' analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, wrote in a client note. The move suggests the Japanese central bank ``is nowhere near ready to introduce quantitative easing steps.''

Governor Masaaki Shirakawa told a press briefing that the Japanese economy had clearly worsened this month and that three dissenters had wanted a quarter-point cut. One favored no reduction and four voted for the move.

The Japanese currency is popular in carry trades, where purchases of higher-yielding assets are funded in nations with lower rates. Japan's key rate of 0.3 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.

The Pound

The British pound declined 9 percent this month, headed for its biggest drop since losing 12 percent in October 1992, on speculation the Bank of England will lower interest rates as the economy slows.

The U.K. will be trapped in a recession throughout next year and deflation may take hold if interest rates don't drop soon and ``significantly,'' BOE policy maker David Blanchflower said on Oct. 29.

The British central bank will lower benchmark rates by a half-point to 4 percent when it announces its next decision on Nov. 6, according to a Bloomberg survey of 30 economists.

``We remain concerned about British pound given the deteriorating economic outlook in the U.K., and recent signals from the BoE suggest scope for more aggressive easing than previously,'' wrote New York-based Sophia Drossos, a strategist at Morgan Stanley in a research note yesterday.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.netStanley White in Tokyo at swhite28@bloomberg.net

Last Updated: October 31, 2008 07:07 EDT