Sept. 17 (Bloomberg) -- The dollar may extend its decline after sliding to the weakest level versus the euro in almost a year as an increase in America’s industrial output encouraged investors to shift funds to higher-yielding assets.

The euro gained yesterday versus the dollar as traders succeeded on their third attempt at pushing the currency past $1.4720, a technical level just above the Dec. 18 high. The Mexican peso and South African rand were two of the biggest winners against the dollar and yen among the 16 most-traded currencies tracked by Bloomberg, on increased risk demand.

“We are in an environment that is constructive for growth,” said Lauren Rosborough, a currency strategist in London at Westpac Banking Corp. “It is positive for high- yielding, high-beta currencies. We are seeing evidence that cash is moving out of banks.”

The dollar changed hands at $1.4713 per euro at 6:04 a.m. in Tokyo, after trading yesterday at $1.4737, the weakest level since Sept. 25, 2008. The yen was at 90.93 per dollar and touched 90.13, the strongest level since Feb. 12. Japan’s currency fetched 133.78 per euro.

The peso gained 0.9 percent to 13.17 versus the dollar and the rand advanced 0.4 percent to 12.41 yen on speculation investors will increase carry trades, in which they sell the currency of a nation with low interest rates and buy assets where returns are higher. The U.S. target lending rate of zero to 0.25 percent and Japan’s 0.1 percent benchmark compare with 7 percent in South Africa and 4.5 percent in Mexico.

Rising Stocks

The Standard & Poor’s 500 Index rose 1.5 percent yesterday, and the VIX, the benchmark index for U.S. stock options, slid to its lowest intraday level in a year as investors paid less for protection against declines in equities.

Output at U.S. factories, mines and utilities climbed 0.8 percent last month, exceeding the median estimate of economists surveyed by Bloomberg News, according to data from the Federal Reserve in Washington.

“The dollar is on its back heels,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. “Until we get a setback in the risk markets, the dollar looks to remain under pressure.”

The Philadelphia Fed will report today that its index of the region’s manufacturing activity advanced this month to the highest level since 2007, according to the median forecast of 55 economists in a Bloomberg News survey. The index is expected to increase to 8 from 4.2 in August, with a positive reading signaling expansion.

Dollar Index

The Dollar Index, which tracks the U.S. currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell as much as 0.5 percent to 76.151, the lowest level since Sept. 23, 2008. The gauge dropped 15 percent from its 2009 high of 89.624 reached in March.

“The trend is for continued improvement in risk appetite,” said Michael Woolfolk, a managing director in New York at BNY Mellon, the world’s largest custodial bank, with more than $23 trillion in assets under administration. “The dollar remains under pressure.”

The dollar’s value versus the yen fluctuated, increasing as 10-year U.S. Treasury yields rose and dropping as prices advanced. Price and yield move in opposite directions.

“Fixed-income markets have been absolutely clobbered, increasing the rate differential,” said MacNeil Curry, a technical analyst at Barclays Plc in New York. “The big thing you want to watch is 10-year rates. If we can get above 3.54 percent and hold the push, the argument’s going to be quite strong for dollar-yen to push higher.”

Treasury Yield

The 10-year Treasury note’s yield rose as high as 3.50 percent, the most since Sept. 10, before ending the day at 3.47. The dollar bought as much as 91.37 yen, a 0.4 percent gain, before changing hands at about 91.

The difference between U.S. 2- and 10-year note yields was 2.48 percentage points, more than double the 1.11 percentage point difference between comparable Japanese securities.

The pound fell to a four-month low against the euro as a report showed the U.K.’s jobless rate rose to the highest level since 1995, supporting the case for the Bank of England to keep the benchmark interest rate at a record low of 0.5 percent.

The BOE’s Governor Mervyn King said on Sept. 15 that policy makers are considering lowering the rate they pay financial institutions to hold reserves at the bank to encourage lending.

“It’s real rollercoaster ride for sterling at the moment,” Tom Levinson, a currency strategist in London at ING Bank NV, said in a Bloomberg Television interview. “Comments from Governor King were pretty dovish. That’s obviously put sterling back under pressure.”

The pound depreciated 0.4 percent to 89.30 pence per euro after earlier reaching 89.33 pence, the weakest level since May 15. Sterling was little changed at $1.6484.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

Last Updated: September 16, 2009 17:07 EDT