Feb. 14 (Bloomberg) -- The yen rose from a one-month low against the dollar after the Japanese economy expanded twice as fast as economists expected in the fourth quarter, reducing the odds of a cut in interest rates.

Japan's currency climbed versus 13 of the 16 most-active currencies as the report showed exports to Asia and emerging markets helped the economy withstand a U.S. slowdown. Traders pared bets the Bank of Japan will reduce borrowing costs this year from 0.5 percent, according to Bloomberg calculations using Credit Suisse Group prices for overnight interest-rate swaps.

``That was a positive surprise and the initial reaction was yen buying,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``This will certainly reduce expectations of a rate cut.''

The yen rose to 108.24 per dollar at 6 a.m. in London, after touching 108.38 yesterday, the weakest since Jan. 14. It was at 108.33 late yesterday in New York. The yen gained to 157.63 per euro after reaching 157.90 yesterday, the lowest since Feb. 5.

Japan's currency may rise to 103 per dollar by March 31, Mizuho's Fukui said.

The U.S. dollar traded at $1.4569 per euro from $1.4573 late yesterday in New York. The Australian dollar rose 0.5 percent to 90.25 U.S. cents after a government report showed employers hired 26,800 workers in January, more than economists expected, and the jobless rate fell to the lowest since 1974.

The yen advanced the most against Taiwan's dollar, gaining 0.3 percent to 0.2929. Japanese government bonds fell as the growth data weakened the BOJ's case for cutting rates. Taiwan's benchmark rate is 3.375 percent, Australia's is 7 percent, Europe's is 4 percent and the U.S. is 3 percent.

Rate Outlook

The difference in yield between benchmark two-year U.S. and Japanese bonds, among the securities most sensitive to interest rate changes, was 1.33 percentage points, narrowing from 1.46 percentage points on Feb. 4.

There is about an 18 percent chance the Bank of Japan, starting a two-day policy meeting today, will cut its benchmark interest rate by a quarter-percentage-point from 0.5 percent by June, down from odds of about 36 percent on Jan. 23, according to Credit Suisse prices for overnight interest-rate swaps.

Gross domestic product rose an annualized 3.7 percent in the fourth quarter, compared with a revised 1.3 percent in the third quarter and the median estimate of 1.7 percent in a Bloomberg News survey.

Scrap Bets

Morgan Stanley recommended investors scrap bets on the yen rising and buy the Australian dollar because too many speculators are betting on Japan's currency strengthening.

Futures traders increased their bets to the highest since February 2004 that the yen will strengthen against the dollar, figures last week from the Washington-based Commodity Futures Trading Commission showed.

``We are cautious about being long yen as positions are accumulated and may be setting up for a retracement,'' according to Morgan Stanley's report written by analysts New York-based Sophia Drossos and Yilin Nie and London-based Ned Rumpeltin. Morgan Stanley is the world's second-largest securities firm.

The yen fell to 97.64 versus Australia's currency from 97.10 yesterday in New York.

Carry Trades

The yen declined 1 percent versus the dollar yesterday as a report showed U.S. retail sales unexpectedly climbed, prompting investors to increase holdings of higher-yielding assets funded in Japan, or so-called carry trades. The MSCI Asia-Pacific Index of regional stocks gained 3.6 percent.

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 them. The risk is that currency moves erase those profits.

Any losses for the yen may be limited by speculation Japanese exporters will buy their currency, betting it will resume an eight-month rally.

``I can see lots of dollar-selling orders by Japanese exporters at this 108-ish level,'' said Takao Yahata, manager of foreign-exchange and financial products trading in Tokyo at Mitsubishi UFJ Trust and Banking Corp., a unit of Japan's largest publicly traded lender by assets. ``This will offset any speculative yen selling.''

Japan's currency may move between 107.50 and 108.80 per dollar today, Yahata predicted.

Stocks Correlation

The yen may weaken as stronger-than-expected Japanese growth led to a rally in Japanese stocks and will prompt investors to purchase higher-yielding assets funded in Japan, said Kenichi Yumoto at Societe Generale SA.

``Yen-buying will soon lose steam,'' said Tokyo-based Yumoto, senior dealer at France's second-largest bank by market value. ``In Tokyo, actual commercial buying and selling of dollar-yen prevails, but this is not true in London and New York time. There is still a strong correlation between a rise in stocks and a decline in the yen.''

Japan's currency may decline to 108.50 per dollar and 159 a euro today, Yumoto forecast.

The Nikkei 225 Stock Average rose 4.2 percent and had a correlation of minus 0.93 with the yen in the past six months, according to data compiled by Bloomberg. A value of minus 1 means the two tend to move in opposite directions.

The U.S. dollar, also known as the greenback, may be supported by speculation lower interest rates and a government stimulus plan will help the U.S. economy avoid a recession.

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will testify before the Senate Banking Committee on the economy and financial markets today at 10 a.m. Washington time.

``Congressional testimony may sound supportive enough for the dollar to get a boost,'' said Kengo Suzuki, a currency strategist in Tokyo at Shinko Securities Co. ``We've had a good look at the monetary and fiscal policy response so far. The U.S. economy will slow, but it may avert a recession.''

The U.S. currency may rise to 108.80 yen today, he said.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: February 14, 2008 01:02 EST