Dec. 2 (Bloomberg) -- The dollar and the yen declined the most against the euro in a week as central banks acted to stem the economic slump, reducing the currencies’ haven appeal.

The yen fell against the South African rand and Norway’s krone as the Bank of Japan said it will accept lower-grade corporate debt as collateral for loans. China’s yuan traded near a five-month low versus the dollar on bets the central bank favors a weaker currency two days before U.S. Treasury Secretary Henry Paulson visits Beijing to push for appreciation.

“We’re probably going to see a bit more risk appetite,” said Dave Floyd, global head of foreign-exchange research in Bend, Oregon, at Aspen Trading Group, a research and trading firm. “That will lead to a reversal of some dollar gains it had in recent days.” Floyd is buying the pound and the euro against the dollar.

The greenback fell 0.8 percent to $1.2707 per euro at 4:13 p.m. in New York, from $1.2611 yesterday. The yen dropped 0.9 percent to 118.57 per euro from 117.52. Japan’s currency traded at 93.29 against the dollar, compared with 93.19, after touching 92.63, the strongest since Oct. 28.

The yuan fell to 6.8873 per dollar, the weakest since mid- June, before paring its drop after touching the daily trading limit. It slid 0.7 percent yesterday, the biggest loss since the central bank ended a fixed exchange rate in 2005.

Paulson’s China Visit

Paulson will reiterate the urgency for China to allow its currency to appreciate when he visits Beijing on Dec. 4 and 5, David McCormick, the Treasury’s undersecretary for international affairs, told reporters in Washington yesterday.

The yuan may weaken as much as 10 percent as China’s economy slows, wrote Stephen Jen, global head of currency research in London at Morgan Stanley, in a note today. He abandoned a forecast for no depreciation in the currency.

Australia’s dollar gained 0.7 percent to 64.45 U.S. cents after the Reserve Bank of Australia cut the target lending rate by a percentage point to a six-year low of 4.25 percent. Policy makers said the cash target is now at a level that will stimulate growth.

Central bankers will lower interest rates this week by 1.5 percentage points to 5 percent in New Zealand, 1 percentage point to 2 percent in the U.K. and a half-percentage point to 2.75 percent in the euro region, according to the median forecast of analysts surveyed by Bloomberg.

Yen Versus Rand

The yen depreciated 1.6 percent to 9.01 versus the rand and 1.3 percent to 13.25 against the krone on speculation investors will slow the unwinding of carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.

The Bank of Japan kept its target lending rate today at 0.3 percent, compared with 12 percent in South Africa and 4.75 percent in Norway. The bank will begin accepting BBB or higher- rated corporate bonds as collateral for loans to banks to unlock credit markets.

The Standard & Poor’s 500 Index rose 4 percent a day after the biggest rout since mid-October. Europe’s Dow Jones Stoxx 600 Index gained 1.7 percent.

“We’re seeing tentative improvement in market sentiment,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “I don’t think this represents a new trend. The trend is continued difficulty for the global economy and financial markets, leading to further strength of the dollar and the yen.”

Currency Fund Returns

Foreign-exchange funds had their biggest monthly returns in October since 2003 as investors sold higher-yielding assets and bought the U.S. dollar, Parker Global Strategies LLC said today. Currency funds gained 2.53 percent, according to the Stamford, Connecticut, firm, whose Parker FX Index tracks 68 firms managing more than $36 billion in assets.

Federal Reserve Chairman Ben S. Bernanke said yesterday in Austin, Texas, he may use less conventional policies, such as buying Treasury securities, to revive the economy because his room to lower the target lending rate from the current 1 percent level is limited.

“I am still very dollar-bullish,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at MF Global Ltd. in Chicago. “The market discussion was the dollar may get hurt because of the inflationary effect of the Fed pumping money into the system. The problem is the banks aren’t lending, and credit isn’t loosening. The dollar will continue to benefit from safe- haven flows.” The greenback may climb to $1.20 per euro by year-end, Hoversen said.

The cost of borrowing in dollars for one month held near the highest level in four weeks as banks vied for year-end funding. The London interbank offered rate, or Libor, increased one basis point to 1.90 percent today, British Bankers’ Association data showed.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: December 2, 2008 16:20 EST