Sept. 5 (Bloomberg) -- The yen climbed to the highest in more than a year against the euro on concern the credit-market slump will lead the world into a recession, prompting investors to sell higher-yielding assets funded in Japan.

The dollar fell versus the yen before a U.S. government report that will probably show employment dropped for an eighth month. The yen also jumped to a two-year high against the Australian and New Zealand dollars as investors reversed so- called carry trades after stocks and commodities slumped. The pound weakened for a ninth day versus the dollar.

``There is a big move in terms of risk aversion and we can see the yen getting stronger from here,'' said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group. ``The world is not particularly rosy and the credit crunch and financial problems haven't gone away. It's not appealing to stay in carry-trade type positions.''

Against the euro, Japan's currency climbed to 150.60 yen, the strongest since Aug. 17, 2007, before trading at 151.15 yen as of 6:14 a.m. in New York, from 153.40 yen. The yen reached 105.69 per dollar, the strongest since July 17, before trading at 106.24, from 107.08. The euro fell to $1.4221, from $1.4325. It earlier touched $1.4214, the weakest since Oct. 24.

Japan's currency had its seventh straight gain versus the euro as stocks and commodities around the world tumbled. The MSCI World Index to its worst weekly slump since 2002 and U.S. stock-index futures dropped. The UBS Bloomberg Constant Maturity Commodity Index reached a seven-month low.

The yen may rise to between 103 and 104 per dollar and to 150 yen per euro in the coming week, McMahon said.

Payrolls Report

The dollar may extend its drop before a report that may show U.S. payrolls fell by 75,000 after declining by 51,000 in July, according to the median estimate of 76 economists in a Bloomberg News survey before the Labor Department report due at 8:30 a.m. in Washington today. The unemployment rate likely stayed at a four-year high of 5.7 percent.

The Australian dollar dropped to 86.12 yen, from 88.10 yen yesterday, and touched 85.89 yen, the lowest since July 2006. New Zealand's dollar slumped to 70.69 yen, from 72.04 yen, reaching 69.90 yen earlier, the lowest since July 2006.

Japan's currency often gains when demand for higher- yielding assets declines, as traders reverse carry trades. In such trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand.

`Huge' Moves

Volatility implied by dollar-yen options expiring in one- month rose to 13.13 percent, the highest since mid-July, showing market swings may erase carry-trade profits.

``These currency moves are huge,'' said Toru Tokoyoda, head of foreign-exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm. ``Volatility is likely to squeeze higher on further gains in the yen as that would spur demand to hedge against that move.''

One-month volatility may rise to 15 percent provided that the yen rises to 105 per dollar today, he said.

The yen also benefited on concern Russia's conflict with Georgia will escalate. Investors have taken about $30 billion out of Russia since the start of its five-day war with Georgia on Aug. 8, according to BNP Paribas SA. The U.S. and the European Union have demanded Russian soldiers withdraw to their pre-war positions.

Central Bank Sales

``This issue is serious and the yen is the safest place in this massive geopolitical problem,''' said Toshi Honda, a currency strategist at Mizuho Corporate Bank Ltd. in London. ``The yen move is all due to risk aversion and the risk is mostly deriving from the deterioration of relations with Russia. The yen is enjoying a safe-haven status.''

Russia's ruble snapped three days of declines after the central bank said it sold a ``significant'' amount of foreign reserves yesterday to prop up the currency. The ruble rose to 30.3847 against the central bank's dollar-euro basket, from 30.4045 yesterday.

South Korea's won rose 1 percent to 1,117.95, reversing an earlier drop of as much as 1.2 percent, on speculation the central bank is buying the currency to halt its declines. The nation's foreign-exchange reserves fell by $21 billion in the five months through August to $243 billion as the Bank of Korea bought the won.

The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB yesterday kept its main refinancing rate at a seven-year high of 4.25 percent and President Jean-Claude Trichet told a press conference growth risks are on the ``downside.''

Lowered Forecasts

The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15. The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent.

The pound fell for a ninth day, reaching a two-year low of $1.7538 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.

Concern that the financial crisis will deepen was heightened as the ECB said yesterday banks in the U.K., Spain and Ireland that have relied on the central bank for low-cost funding will soon have to pay more. The ECB will increase the so-called `haircut' on most asset-based securities from Feb. 1 to 12 percent from as low as 2 percent, the central bank said yesterday. That means it will lend just 88 percent of the value of the paper.

``The liquidity situation continues to be severe and this could be one reason for the euro to weaken,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``This also focuses attention on the divergence in banks and economies in the euro region.''

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Last Updated: September 5, 2008 06:58 EDT