Nov. 22 (Bloomberg) -- The yen retreated from the highest in more than two years against the dollar as stock gains gave investors confidence to buy high-yielding assets funded with Japanese loans.

The yen fell against 10 of the 16 most-traded currencies as stock markets rose in Europe and Japan. The dollar dropped to an all-time low of $1.4873 against the euro before rallying after European Central Bank President Jean-Claude Trichet said he opposes ``brutal'' currency moves. The dollar also traded at a record low versus the Swiss franc.

``The yen is being sold off slightly,'' said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London, a unit of Japan's largest publicly traded bank by assets. ``The main driver has been stability in Asian equity markets despite the selloff in the U.S.''

Japan's currency fell to 108.50 per dollar at 12:34 p.m. in New York, after touching 108.26 yesterday, the strongest since June 2005. It was little changed at 161.15 per euro from 161.13.

The yen fell the most against the South African rand and Canadian dollar, dropping 0.6 percent, and 0.2 percent, respectively. Hardman forecast the yen may rise to 105 against the dollar.

The European common currency has gained 12.5 percent against the dollar this year as the Federal Reserve cut interest rates twice to prevent a U.S. housing slump from triggering a recession.

``Given increased concern about the health of the U.S. economy, the euro will try and push toward the psychologically important level of $1.50,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets.

German Spending

``Excessive volatility and disorderly movements on currency markets play against global growth,'' Trichet said in Paris today, addressing a panel appointed by French President Nicolas Sarkozy charged with spurring economic growth. ``I am against brutal, quick and, as I have said, brutal moves.''

Consumer spending in Germany, the European Union's biggest economy, increased 0.5 percent in the third quarter, the Federal Statistics Office in Wiesbaden said today, stoking investor speculation the ECB may need to increase borrowing costs from 4 percent this year. The implied yield on the Euribor December futures contract was 4.64 percent, up from 4.58 percent a week earlier.

``The euro continues to break new records,'' Hardman said. ``That's because interest rate differentials continue to move in the euro's favor against the U.S.'' Hardman predicts the euro will strengthen to $1.51 in three months.

`Challenging Conditions'

The dollar has also lost 14.2 percent against the yen since reaching a 4 1/2-year high of 124.13 on June 22, as investors retreated from the so-called carry trade.

``The yen's performance has been linked to equity markets,'' said Phyllis Papadavid, a strategist for Group of 10 currencies at Societe Generale SA in London. ``Risk conditions are still a bit challenging.''

In carry trades, investors sell currencies in countries with low borrowing costs and buy higher-yielding assets elsewhere, profiting from the difference. The risk is exchange- rate fluctuations erase those profits. Japan's key interest rate is 0.5 percent compared with Brazil's 11.25 percent rate.

The yen fell as European stocks rose, with the Dow Jones Stoxx 600 Index climbing 0.8 percent. The Nikkei 225 Stock Average rose 0.3 percent. The Nikkei has been 95 percent correlated with the dollar against the yen in the past month.

Raised Bets

The odds of the Fed cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 were 90 percent, up from 68 percent a month ago, futures contracts traded on the Chicago Board of Trade showed.

``The dollar is going to remain under pressure, given the uncertainty in the global financial sector, which is stemming from housing concerns and U.S. exposure to that weakness,'' Papadavid said.

Losses from U.S. subprime-mortgage foreclosures, coupled with slowing economic growth and falling house prices, could rise to as much as $300 billion, the Organization for Economic Cooperation and Development said in a report released in Paris.

The yield advantage of U.S. two-year Treasuries over similar-maturity Japanese government debt shrank to 2.28 percentage points today, the narrowest since 2004, making U.S. assets less attractive to international investors. The two-year German note held its yield advantage over comparable-maturity Treasuries at 62 basis points, near the most since 2004.

U.S. markets were closed for the Thanksgiving holiday.

To contact the reporters on this story: Kim-Mai Cutler in London at at kcutler@bloomberg.net

Last Updated: November 22, 2007 13:14 EST