May 28 (Bloomberg) -- The yen fell to a one-month low against the euro as rising stocks and falling oil spurred investors to add to holdings of higher-yielding assets funded in Japan's currency.

The currency also traded at a three-month low versus the Australian dollar, a favorite for so-called carry trades. Crude oil fell to a one-week low and Standard & Poor's 500 Index futures advanced, reversing an earlier decline. The dollar reached a one-week high against the euro.

``S&P futures were down before and now they are up slightly,'' said Adrian Schmidt, a senior currency strategist at Royal Bank of Scotland Group Plc in London. ``People are eager to put on carry trades and the dollar is generally firmer.''

The yen traded at 164.15 per euro at 7:45 a.m. in New York and touched 164.27, the weakest since April 24, from 163.58 yesterday. It fell to 104.88 per dollar, from 104.24. The dollar strengthened to $1.5651 per euro, from $1.5691.

The Japanese currency touched 100.46 versus the Australian dollar, the weakest since Feb. 28, from 99.91 yesterday.

European stocks gained, with Germany's benchmark DAX Index adding 1 percent, as oil dropped as much as 1.9 percent to $126.37 a barrel on the New York Mercantile Exchange.

In the carry trade, investors get funds in a country with low borrowing costs and invest where rates are higher, earning the difference between the two. Japan's benchmark interest rate is 0.5 percent, the lowest among major economies.

Treasury Sales

The dollar also rose against the yen as the Treasury prepared to sell $49 billion of two- and five-year notes today and tomorrow. The U.S. currency appreciated 0.3 percent against the yen and 0.6 percent against the euro when the government sold $30 billion of two-year securities on April 23.

``There could be quite a lot of dollar-buying interest as the day progresses,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There should be reasonable demand for U.S. government debt.''

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, climbed to 72.401, from 72.338 yesterday.

Futures on the Chicago Board of Trade showed a 28 percent chance the Fed will raise its target rate by a quarter- percentage point on Sept. 16, up from 21 percent a week ago.

German Inflation

The euro may get support from a report that will probably show inflation in Germany quickened in May, adding to speculation the European Central Bank will raise interest rates.

Separate reports today showed German import prices climbed more than forecast in April and growth in the 15-nation euro region accelerated in May.

German import prices increased 0.9 percent from March, when they rose 0.4 percent, the Wiesbaden-based Federal Statistics Office said today. The London-based Center for Economic Policy Research gauge of growth rose to 0.37 percent, from 0.3 percent in April.

``The euro is being supported'' by faster inflation, said Marcus Hettinger, a foreign-exchange strategist in Zurich at Credit Suisse Group, one of the world's top 10 currency traders. ``A rate cut is wishful thinking this year.''

The annual inflation rate in Germany, based on a harmonized European Union method, may rise to 2.9 percent in May from 2.6 percent in April, the Federal Statistics Office in Wiesbaden may say today, according to the median of 25 forecasts in a Bloomberg News survey.

Buy the Euro

Royal Bank of Scotland Plc recommended investors buy the euro against the dollar, after the company last week pushed back its forecast for the timing of an ECB interest-rate cut to the second quarter of next year.

``Oil-related stagflation worries will play moderately positively for the euro,'' strategists led by David Simmonds, global head of currency research at the U.K.'s second-biggest lender, wrote in a research note yesterday. This is ``due to perceived different Fed and ECB policy responses and because the U.S. is at a more vulnerable point in its growth cycle.''

Europe's single currency may rise to $1.60 by the end of June, the bank forecast.

Demand for carry trades may wane in coming days as oil prices near record levels weigh on investor willingness to buy higher-yielding assets financed with loans in Japan, supporting the yen, said Kamal Sharma, a currency strategist in London at JPMorgan Chase & Co.

``We are a bit skeptical regarding the outlook for carry trade,'' said Sharma. ``The rotation from growth concerns to inflation concerns is negative for the carry trade. In that context we don't think the pressure on the yen is likely to continue.''

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: May 28, 2008 07:56 EDT