Oct. 19 (Bloomberg) -- The yen rose to the highest in more than a week against the euro as a decline in Asian stocks and the increased risk of holding corporate debt prompted investors to sell higher-yielding assets bought with loans in Japan.

The currency gained a fifth day against the dollar, the longest-winning streak in almost a year, and headed for its best week versus the euro in two months. It also rose on speculation European officials will express concern over its weakness at a Group of Seven meeting in Washington today. Stocks fell in Asia and Europe and gold rose to a 27-year high for a second day.

``The market is becoming more nervous in terms of risk appetite,'' said Marios Maratheftis, a currency strategist in London at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``It's also nerves before the G-7 meeting'' pushing the yen higher.

The yen rose to 164.87 per euro at 11:15 a.m. in London, from 165.30 late yesterday in New York. Earlier, the yen traded as high as 164.21, its strongest since Oct. 9. It's still down 5 percent against the euro this year.

Against the dollar, the Japanese currency advanced to 115.44, from 115.63. It also gained against all but three of the 16 most-actively traded currencies.

The dollar was poised for its biggest weekly loss in three against the euro as speculation increased that market turmoil sparked by the U.S. housing slump will tip the economy into recession, leading the Fed to cut interest rates for a second time this year.

The U.S. currency was at $1.4281, from $1.4279 yesterday, and dropped to a record low of $1.4319 earlier.

Increased Bets

Traders increased bets the Fed will cut benchmark borrowing costs this month, interest-rate futures showed. Bank of America Corp., the second-largest U.S. bank, said yesterday that profit fell 32 percent in the third quarter. The International Monetary Fund this week cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent.

``Most people believe the G-7 won't change the backdrop, which is conducive to dollar weakness,'' said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. ``We have a divergence in expected monetary policy that's going to support the euro at the dollar's expense.''

The yen rose to 86.62 against the New Zealand dollar, from 91.35 at the end of last week. It gained to 102.96 versus the Australian dollar, compared with 106.39 on Oct. 12. Japan's currency advanced 2.2 percent this week to 118.39 per Canadian dollar.

`Undervalued'

``There could be some reference at the G-7 to the yen and the fact that it's undervalued,'' said Russell Jones, who was appointed last month to head global fixed-income and currency research at RBC Capital Markets in London, a unit of Canada's largest lender by assets.

The Japanese currency may rise to 114.5 to the dollar today, Jones said.

The Morgan Stanley Capital International Asia-Pacific Index of regional shares fell 1 percent on concern a deepening U.S. housing market slump will cool global growth, eroding demand for Asian exports of commodities and manufactured goods.

The iTraxx LevX Senior Index of contracts on loans to 35 European companies was recently at 97.52, according to Bear Stearns Cos., indicating leveraged loans are still trading below face value. The index on Oct. 15 reached 99.625, the highest in three months, and has climbed from as low as 92.5 on July 30. The main stock index in Germany, Europe's largest economy, fell to the lowest since Oct. 1 today.

Carry Trades

Increased aversion to risk has caused investors to reverse so-called carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates, earning the spread between the two. The Bank of Japan's benchmark borrowing cost is 0.5 percent, compared with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent rate and Australia's 6.5 percent.

The U.S. currency may also weaken as speculation wanes that its 8 percent decline this year versus the single European currency will be highlighted at the G-7 meeting.

The G-7 will address the credit-market slump and the role of rating companies, officials said. The group, made up of the U.S., U.K., Japan, Germany, Canada, Italy and France, is expected to release a statement after 6 p.m. in Washington.

Nations sharing the euro are split on its strength. While French President Nicolas Sarkozy has said the euro's appreciation is hurting European exports, German Finance Minister Peer Steinbrueck said he prefers ``a strong euro.'' U.S. Treasury Secretary Henry Paulson on Oct. 16 brushed aside suggestions he'll face criticism from Europeans that a weaker dollar is taking an unfair toll on exports.

G-7 Meeting

``The yen won't be specifically mentioned in the G-7 communiqué,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``They know Japan cannot easily raise rates as the pace of Japan's inflation is very slow, and because the U.S. is heading for lower rates.''

The yen may rise to 112 a dollar by year-end, Kameoka said. The BOJ may delay a rate increase until February, he said.

Traders raised bets the Fed will reduce borrowing costs on Oct. 31, after a government report this week showed housing starts slumped to a 14-year low and Standard & Poor's cut ratings on $23.4 billion of mortgage securities.

Interest-rate futures traded on the Chicago Board of Trade show a 70 percent chance the Fed will lower its target rate for overnight loans between banks a quarter-percentage point to 4.5 percent this month, following a half-point cut on Sept. 18. The odds were 40 percent a week ago.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net;

Last Updated: October 19, 2007 07:15 EDT