Aug. 13 (Bloomberg) -- The euro strengthened for a third day against the dollar after a German report showed Europe’s largest economy unexpectedly expanded in the second quarter, adding to signs the global recession is abating.

Europe’s currency also gained for a second day versus the yen before a European report that economists said will show the contraction in the 16-nation region slowed last quarter. The dollar fell against 14 of the 16 major currencies after the Federal Reserve said it will keep interest rates low for an “extended period,” diminishing the appeal of U.S. assets. South Korea’s won led Asian currencies higher as signs the global economy is improving boosted regional stocks.

“Evidence is pointing toward a bottoming out in the economy,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Interest rates may stay somewhat high in the euro zone. The euro will probably trade in a firm manner.”

The euro strengthened to $1.4268 as of 7:38 a.m. in London from $1.4188 yesterday in New York. It advanced to $1.4447 on Aug. 5, the highest level since Dec. 18. Europe’s currency climbed to 137.24 yen from 136.32 yen. The yen traded at 96.15 per dollar from 96.06.

Emerging-market currencies strengthened as Asian stocks gained. The MSCI Asia-Pacific Index of regional shares rose 1.7 percent after the Standard & Poor’s 500 Index added 1.2 percent yesterday when the Fed’s released its policy statement.

The won closed up 0.7 percent at 1,237.35 per dollar, the Malaysian ringgit gained 0.4 percent to 3.5140, and Indonesia’s rupiah climbed 0.5 percent to 9,940.

German Economy

The euro strengthened after Germany’s Federal Statistics Office said today gross domestic product expanded a seasonally adjusted 0.3 percent from the previous three months, when it slumped a record 3.5 percent.

The European economy contracted 0.5 last quarter, after shrinking 2.5 percent in the three months to March 31, the European Union’s statistics office will say today, according to a Bloomberg News survey

“I expect growth in the euro-zone economy will be very high” later this year and that should benefit the euro, said Adam Carr, a Sydney-based senior economist at ICAP Australia Ltd., a unit of the world’s largest interdealer broker.

The euro may advance to $1.50 toward year-end, Carr said.

The European economy may return to growth sooner than expected and inflation risks should not be underestimated, European Central Bank Executive Board member Juergen Stark said, according to a report in Boersen-Zeitung yesterday.

Dollar Index

The Dollar Index dropped for a third day after the Fed said in a statement following its two-day meeting yesterday that the economy is “leveling out.” The Fed also said it will wind down purchases of Treasuries that had been slated to end in September. The central bank has left its target rate for overnight lending between zero and 0.25 percent since December.

“There may be upside risks to the U.S. economic outlook,” said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded bank. “Risk- taking appetite is returning and the bias is for the yen and the dollar to be sold.”

The Dollar Index, which the ICE uses to track the dollar against currencies of six major U.S. trading partners such as the euro, fell to 78.574 from 78.790 yesterday, after dropping to 78.538, the weakest level since Aug. 7.

The won gained for the first time in five days against the dollar as demand for riskier assets increased and overseas investors bought more Korean shares than they sold.

“The dollar’s going to remain a low-yielding currency for a period of time, and the Fed will do anything they can to nurture the economy,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “That combination’s a positive one for Asian currencies even if it’s not a surprise. The trend towards risk appetite is intact for the near-term.”

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: August 13, 2009 02:41 EDT