Aug. 17 (Bloomberg) -- The yen headed for the biggest weekly advance against the euro since March 2000 as the subprime mortgage crisis is hurting global credit markets, pushing investors to sell riskier assets funded by loans in Japan.

Japan's yen has gained versus all 16 major currencies this week as the carry trades unwound. The yen's advance may be curbed today after the Standard & Poor's 500 Index rebounded yesterday. Bear Stearns Cos., the second-largest U.S. underwriter of mortgage bonds, climbed after Punk Ziegel & Co. analyst Richard Bove said the firm may sell a stake of as much as 20 percent.

``Risk appetite was trimmed and investors avoided riskier assets,'' said Rajeev Bhargava, currency strategist with State Street Global Markets in Boston, one of the world's largest custodians of investor assets with $12.3 trillion. ``You are seeing these yen shorts being washed out of the market.'' A short is a bet on a currency's decline.

The Japanese currency traded at 114.05 per dollar and 153.04 per euro at 6:07 a.m. in Tokyo. The yen has advanced 4 percent so far this week against the dollar. Japan's yen has gained 6 percent versus the euro over the same period, the biggest weekly increase since March 2000.

Japan's yen has rebounded from a record low of 168.99 per euro on July 23, and 124.13 per dollar on June 22, the weakest since December 2002.

The yen has gained 12.6 percent so far this week against the New Zealand dollar, 10.9 percent versus Australia's dollar, 6.1 percent versus the pound, 9.5 percent against the Brazilian real and 8.2 percent versus the South African rand.

Interest Rates

The Australian and New Zealand currencies are carry-trade favorites, with benchmark interest rates at 6.5 percent and 8.25 percent, respectively. Japan's borrowing costs of 0.5 percent are the lowest among major economies.

The last time the carry trade crashed was in 1998 after Russia's debt default in August. The yen gained 20 percent in less than two months.

``Investors continue to reduce risk given the turmoil we're seeing in credit and equity markets,'' said Sophia Drossos, chief currency strategist for Morgan Stanley in New York. ``Markets are very unnerved right now.''

Countrywide Financial Corp., the biggest U.S. mortgage lender, tapped an $11.5 billion credit line yesterday after its access to short-term financing was curbed. Hedge funds face potential losses on collateralized debt obligations, securities packaging bonds, loans and other assets, Chris Mahoney, vice chairman of Moody's Investors Service in New York, said on a conference call yesterday.

Yen Volatility

Volatility on one-month dollar-yen options reached 20 percent yesterday, the most since 1999. Volatility on one-month euro-yen options reached 19.5 percent, the highest in seven years. The 10-year interest-rate swap spread, a gauge of what companies pay over benchmark lending rates, rose to 78.1 basis points yesterday.

``The unwinding of the carry trade is not over,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``It is like a sandstorm coming from all angles. The scope of the moves and the significance of the market scrambling for credit and liquidity has pushed the financial markets to the brink.''

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: August 16, 2007 17:12 EDT