Dec. 3 (Bloomberg) -- The yen rebounded from a two-week low against the dollar after Moody's Investors Service said it is preparing the biggest credit-rating cuts since subprime-mortgage defaults rocked financial markets.

The yen rose versus all 16 most-traded currencies as investors retreated from carry trades and sold higher-yielding assets bought with loans from Japan. The yen also advanced as Bank of Japan Governor Toshihiko Fukui signaled interest rates may have to rise.

``There's been a broad-based retreat from risk across the board, and the yen always benefits in that environment,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. ``With people worried about economic growth and subprime-mortgage losses the yen is clearly going to benefit.''

The yen rose to 110.41 versus the dollar as of 7:53 a.m. in New York, from 111.24 on Nov. 30, the weakest since Nov. 16. Japan's currency also climbed to 161.83 per euro, from 162.82. The euro advanced 0.2 percent to $1.4658 against the dollar.

Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles, which sell short-term debt to buy longer-term, higher-yielding assets, the credit-rating company said in a statement Nov. 30. Three SIVs defaulted in the past four months as banks became reluctant to lend.

European stocks fell, with the U.K.'s FTSE 100 Index down 0.5 percent and Germany's DAX Index 0.2 percent lower. U.S. stock-index futures also declined.

Carry Trades

``The yen seems to be highly correlated to global equity markets,'' said Adarsh Sinha, a currency strategist at Barclays Capital in London. ``There is a lot of uncertainty surrounding the outcome to the subprime problem. We think there is considerable scope for further yen appreciation.''

The yen may rise to 105 per dollar over the next three months, Sinha said.

The Australian dollar, a favorite of the carry trade, fell 0.9 percent to 97.46 yen, and the New Zealand dollar declined 0.6 percent to 84.55 yen.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate.

Fukui said policy makers need to be aware that keeping interest rates too low may make economic growth unsustainable and that he is still seeing volatility in the global financial markets.

The Bank of Japan's benchmark rate is 0.5 percent, compared with 6.75 percent in Australia, 4.50 percent in Canada and 3.25 percent in Taiwan.

``Fukui's remarks imply a bias for rate hikes,'' said Kenichi Yumoto, senior dealer in Tokyo at Societe Generale SA, France's third-biggest lender. ``The yen is being bought.''

`Paulson's Efforts'

Gains in the yen may be curbed by speculation U.S. Treasury Secretary Henry Paulson will announce an agreement on fixing interest rates on loans to subprime borrowers when he addresses a housing conference from 10:30 a.m. in Washington.

``Paulson's efforts may ease concern over subprime woes,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. Ltd. ``The efforts may spur some weakening of the yen and strengthening of the dollar.''

The euro rose after an industry report showed European manufacturing activity accelerated in November for the first month in five.

Royal Bank of Scotland Group Plc's manufacturing index rose to 52.8 from 51.5 in October, Reuters Plc reported. The October reading was the lowest since August 2005. A measure of input prices jumped to 61.7 from 59, the survey showed.

Rate Advantage

The euro also gained as traders bet the interest-rate difference with the U.S. will narrow as the Federal Reserve cuts borrowing costs, while the European Central Bank keeps its main rate on hold on Dec. 6.

All 52 economists surveyed by Bloomberg News say the ECB will leave its benchmark rate at 4 percent.

The dollar also fell against the British pound and Swiss franc before the Institute for Supply Management's factory index, due at 10 a.m. in Washington today. The gauge declined to 50.7 in November from 50.9 in October, according to a Bloomberg survey of economists. Readings greater than 50 signal expansion.

Against the franc, the U.S. currency declined 0.2 percent from the end of last week to 1.1291. The dollar fell 0.3 percent against the pound to $2.0634.

Futures contracts on the Chicago Board of Trade show a 62 percent chance the Fed will lower its key rate a quarter- percentage point to 4.25 percent on Dec. 11, and 55 percent odds of a cut to 4 percent on Jan. 30.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: December 3, 2007 07:58 EST