Aug. 16 (Bloomberg) -- The yen may rise for a fourth straight day against the euro and dollar as widening losses linked to U.S. subprime debt push investors to pare riskier assets funded by loans in Japan.

Japan's yen has advanced against all 16 most-actively traded currencies this week as traders exited the carry trades amid a global rout of stocks and emerging-market assets.

``The continual driver in the currency market will be the unwinding of the carry trade,'' said Mark Meadows, a trader at currency-trading firm Tempus Consulting Inc. in Washington. ``Investors are fleeing from risk.''

The yen traded at 156.73 per euro and 116.58 per dollar at 6 a.m. in Tokyo. The Japanese currency gained 1.5 percent against the euro and 0.8 percent versus the dollar yesterday.

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 1.5 percent against the dollar so far this week, 3.4 percent versus the euro, 6.6 percent against the New Zealand dollar, 4.5 percent versus the Australian dollar, 7.1 percent against the Brazilian real and 5 percent versus the South African rand.

Stocks Decline

U.S. stocks fell yesterday, extending its losses this week, and following declines in European and Asian equity markets. Two- year Treasuries rallied as investors turned to the safety of government debt.

Countrywide Financial Corp., the biggest U.S. mortgage lender, was downgraded yesterday to ``sell'' by Merrill Lynch & Co., which raised the possibility of bankruptcy if the company loses access to short-term financing.

``The market is trading on fear and uncertainty,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal. ``Investors are getting nervous. They are shedding the carry trade. It is critical to see whether the market is going to restore confidence, or the financial assets continue to get a beating and that fear continues to grip the market.''

The yen has gained 3.9 percent against the dollar, 6.8 percent versus the euro, 16.5 percent versus the New Zealand dollar and 11.4 percent against the Australian dollar since July 20 when the global rout of stocks and corporate debt began.

Volatility Rises

Volatility on one-month dollar-yen options reached as high as 12.5 percent yesterday, the most since June 2004. Volatility on one-month euro-yen options reached 13.5 percent, the highest since April 2004. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.

Japan's 0.5 percent overnight lending rate is the lowest of any major economy. It compares with 8.25 percent in New Zealand, 6.5 percent in Australia, 5.25 percent in the U.S., 4 percent in the euro region and 5.75 percent in the U.K.

The dollar may extend its gains against the euro and pound and currencies in New Zealand and Australia as banks and fund managers scramble to pay loans in the dollar used to buy risky mortgage securities.

The dollar traded at $1.3442 per euro after rising 0.7 percent yesterday when it touched $1.3447, the strongest since June 29. The dollar has rebounded from a record low of $1.3852 per euro on July 24.

``The dollar is getting some benefit from a flight to quality,'' said Adam Boyton, senior currency strategist in New York at Deutsche Bank AG, the world's largest currency trading bank.

U.S. reports today are forecast to show housing starts last month slowed to an annualized pace of 1.4 million, from 1.467 million a month earlier, while the Philadelphia Federal Reserve's survey on manufacturing in the region may drop to 8.6 this month from 9.2 in July.

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

Last Updated: August 15, 2007 17:02 EDT