Nov. 9 (Bloomberg) -- The yen rose to the highest since May last year against the dollar as investors shunned riskier assets bought with loans in Japan. The dollar erased its decline against the euro after dropping to a record low.

The yen climbed against all 16 of the most-traded currencies after stock indexes in Europe and Asia reversed gains and U.S. equity futures declined. Shares of Barclays Plc, Britain's third- biggest lender, fell as much as 9.1 percent before the bank denied speculation of a $10 billion dollar writedown. Wachovia Corp., the fourth-largest U.S. bank, said it may raise its allocation for loan losses.

``We saw a big sell-off in yen-crosses and there's a pick-up in risk aversion due to the heavy liquidation of carry trades,'' said Lee Hardman, a currency strategist at Bank of Tokyo- Mitsubishi Ltd. in London. ``Barclays' shares are down quite a lot and that triggered risk-aversion.''

The yen rose to 110.96 against the dollar, the highest since May 20, 2006, before trading at 111.18 at 7:48 a.m. in New York, from 112.60 yesterday. The euro bought 163.26 yen, from 166.63 last week.

The yen broke key levels of resistance against the dollar at 112.60 and then 111.60, adding momentum to the gain, Hardman said. Resistance is a level where sell orders may be clustered.

Standard & Poor's 500 Index futures expiring in December lost 0.9 percent, to 1,462. Dow Jones Industrial Average futures slipped 0.7 percent, to 13,176.

Barclays Denial

Barclays shares fell into a volatility auction, a temporary halt in trading aimed at matching bids and orders. A spokesman denied speculation on the writedown. Wachovia said today it set aside as much as $600 million for loan losses in the fourth quarter and that the value of some debt securities fell by about $1.1 billion before tax in October.

The dollar rebounded from a record low against the euro. The U.S. currency dropped as far as $1.4752 earlier as traders bet the Federal Reserve would reduce its benchmark interest rate next month to bolster U.S. economic growth.

The euro was at $1.4683, from $1.4676 yesterday.

Morgan Stanley cut its forecasts for the dollar against the yen, euro and pound as the U.S. housing slump curbs expansion and diminishes the allure of the nation's assets.

The dollar will trade at $1.51 per euro by year-end, compared with a previous forecast of $1.42, and will fall to $2.13 per pound and 108 yen, versus prior predictions of $2.03 and 112, Stephen Jen, head of currency research in London at Morgan Stanley, wrote in a research note yesterday.

$1=100 Yen

The yen may rise to 100 per dollar by the end of 2008 as credit-market losses prompt investors to pare carry trades, purchases of higher-yielding assets bought with loans from Japan and other low interest-rate currencies, Lehman Brothers Holdings Inc. and Deutsche Bank AG said.

The dollar declined the most this week against the Japanese yen and the Swiss franc. It fell 3.1 percent against the yen and 2.7 percent versus Switzerland's currency. It slid to 1.1189 against the Swiss currency, the lowest since April 1995, before trading at 1.1227, from 1.1279 yesterday.

The dollar also fell to an all-time low against the synthetic euro, a theoretical value for where the currency would have traded before its inception. The prior record was $1.4557 set in 1992.

The U.S. currency is down this quarter against all 16 of the most-active currencies as the world's biggest banks have written down at least $40 billion in assets tied to U.S. subprime mortgages. Morgan Stanley, the second-biggest U.S. securities firm by market value, said it lost $3.7 billion in the two months through Oct. 31.

The dollar slid yesterday after Fed Chairman Ben S. Bernanke said in testimony to lawmakers the economy will cool ``noticeably'' in the fourth quarter.

Consumer Sentiment

Data today may show the Reuters/University of Michigan consumer confidence index fell to 80 in November, from 80.9 in October, according to a Bloomberg News survey of economists.

Interest-rate futures show 90 percent odds the U.S. central bank will cut rates by a quarter-percentage point to 4.25 percent on Dec. 11, compared with 68 percent a week ago.

The yield advantage of holding two-year German notes over similar-maturity U.S. Treasuries widened to 0.39 percentage point, the most since April 2004.

``On an interest-rate story it's hard to buy the dollar,'' said Chris Loong, head of currency and asset allocation in Sydney at State Street Global Advisors, a unit of the world's largest custodian of assets. ``The biggest growth downgrades are coming out of the U.S.''

Yuan Strengthens

The yuan headed for its biggest weekly advance against the dollar since 2005 after U.S. Treasury Secretary Henry Paulson said China is ``out of step'' with calls to let its currency appreciate.

The exchange rate is ``viewed by many countries as a source of unfair competition,'' Paulson said in prepared remarks to the China Institute in New York yesterday.

The yuan climbed 0.6 percent this week, rising to as high as 7.4104 versus the dollar, the highest since the currency's dollar peg was scrapped in July 2005, according to the China Foreign Exchange Trade System.

Paulson reiterated his support for a ``strong'' dollar and also said a currency's value should be based on economic fundamentals.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: November 9, 2007 08:03 EST