Oct. 29 (Bloomberg) -- The dollar and yen declined the most against the euro in at least seven weeks as a government report showed the U.S. economy grew in the third quarter more than economists forecast, spurring demand for higher-yielding assets.

The U.S. and Japanese currencies slid versus most of their 16 major counterparts tracked by Bloomberg as stocks and commodities rallied and Treasuries fell. The pound rose for a fourth day against the dollar as mortgage approvals climbed in the U.K. to the highest level in 18 months.

“We’re in this sweet spot where growth is not great but respectable and rates are low,” said David Tien, a money manager in New York at Fischer Francis Trees & Watts, which manages $19 billion in assets. “That’s forcing money out into riskier assets.”

The dollar weakened as much as 1 percent to $1.4859 per euro in the biggest intraday drop since Sept. 8, before trading at $1.4827 at 4:13 p.m. in New York, compared with $1.4706 yesterday. The yen declined as much as 1.9 percent to 135.99 per euro in the largest intraday slide since Aug. 3, after earlier reaching 132.81, the strongest since Oct. 14. Japan’s currency weakened 0.8 percent to 91.49 per dollar, from 90.75.

U.S. gross domestic product grew at a 3.5 percent annual rate in the third quarter, after shrinking in the previous four periods, the Commerce Department reported today. The median forecast of 79 economists in a Bloomberg survey was for an increase of 3.2 percent.

The dollar fell 2.6 percent to 1.7332 Brazilian reais while the yen lost 2.8 percent to 83.77 versus the Australian dollar on speculation investors will increase carry trades, in which they borrow in the currency of a nation with low interest rates to purchase assets where returns are higher.

Borrowing Costs

Target lending rates of 0.1 percent in Japan and as low as zero in the U.S. make the yen and dollar favored targets for investors seeking to fund such trades. The benchmark rates are 8.75 percent in Brazil and 3.25 percent in Australia.

The Standard & Poor’s 500 Index increased 2.3 percent. The yield on the 10-year Treasury note rose 0.07 percentage point to 3.48 percent. Crude oil for December delivery increased 3.3 percent to $80 a barrel.

The dollar rose against the euro in the previous four sessions as evidence of a stalled U.S. economic recovery including an unexpected decrease in new-home sales in September reduced demand for riskier assets.

Investors remained skeptical that the Federal Reserve will increase borrowing costs early next year. Fed funds futures indicated today a 33 percent chance that the central bank will lift its target lending rate from a range of zero to 0.25 percent at its March meeting, compared with a 34 percent likelihood yesterday.

‘Not Too Strong’

“The number is not too strong to bring in rate-hike expectations or too weak to verify the doubt that the recovery is faltering,” said Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Stamford, Connecticut. “That gives a boost to risky assets and weakens the dollar.”

Norway’s krone climbed for the first time in five days against the dollar, appreciating 1.8 percent to 5.6434 as crude oil prices rose. Oil is the nation’s largest export.

The central bank raised the overnight deposit rate to 1.5 percent yesterday, becoming the first in Europe to increase borrowing costs since the credit crisis began in 2007.

Advance in Sterling

The pound advanced 1.2 percent to $1.6568 after the Bank of England said lenders granted 56,215 home loans last month, compared with 52,970 in August.

Foreign demand for U.K. bank shares, including Lloyds Banking Group Plc, and other assets helped boost sterling, said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd.

Lloyds’s shares gained as much as 9.6 percent today after the London-based lender said it’s in advanced talks to avoid using the British government’s asset insurance program and is considering a rights offering.

“The pound bears are being stopped out,” Jones said. “Money is coming into the U.K. This is the bottom line.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies including the euro and yen, dropped for the first time in six days, decreasing 0.6 percent to 75.990. It fell 15 percent from a three-year high reached on March 4.

A 5.8 percent drop in the dollar versus the euro in 2009 is a boon to U.S. companies that convert revenue from Europe. McDonald’s Corp., United Technologies Corp. and PPG Industries Inc. are among companies whose earnings may get a boost in the fourth quarter.

“A cheaper dollar is unquestionably positive for U.S. corporate earnings,” said Bankim Chadha, the New York-based chief U.S. equity strategist at Deutsche Bank AG.

The dollar slid 1.3 percent versus the euro in October in its fourth monthly decline, the longest losing streak since 2004. The yen fell 3.2 percent against the euro this month and 1.9 percent versus the dollar.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net

Last Updated: October 29, 2009 16:16 EDT