By Ye Xie and Daniel Kruger Oct. 7 (Bloomberg) -- The yen dropped from near a three- year high against the euro and slid against the dollar as the Federal Reserve's announcement that it will buy commercial paper encouraged investors to resume buying higher-yielding assets. The greenback fell from a 14-month high versus the euro on speculation the Fed's plan will ease demand for U.S. currency funding among banks. Australia's Reserve Bank reduce its cash rate by 1 percentage point, the most since a recession in 1992, triggering speculation other countries will cut borrowing costs. ``We've seen a dramatic capitulation of risk trades in the past few days,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``If there are signs that conditions are beginning to stabilize, then we can see people return to risk trades and the yen will weaken.'' The yen slid 2 percent to 140.29 against the euro at 10:11 a.m. in New York, from 137.50 yesterday, when it touched 135.05, the strongest since September 2005. Japan's currency dropped 0.7 percent to 102.57 per dollar, from 101.82. The dollar fell 1.3 percent to $1.3680 per euro, from $1.3499. It touched $1.3444 yesterday, the strongest since August 2007. The U.S. central bank, invoking emergency powers, will lend against a special purpose vehicle at the targeted fed funds rate. The unit will purchase from eligible issuers three-month dollar-denominated commercial paper at a spread over the three- month overnight-indexed swap rate, according to a press release in Washington today. ``They are clearly pulling out every imaginable stop to get the credit market moving again,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. Iceland's Krona Iceland will fix the krona at a rate corresponding to 131 per euro, effective today. The currency has lost 20.5 percent versus the euro in three months. The country nationalized Landsbanki Islands hf and was in talks to secure a 4 billion euro ($5.43 billion) loan from Russia. The yen dropped 3.1 percent to 14.47 against the Swedish krona, 1.5 percent to 180.32 versus the pound and 0.7 percent to 74.04 against the Australian dollar on speculation the Fed's purchase of commercial paper will encourage carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan left its target lending rate at 0.5 percent today, compared with 4.75 percent in Sweden and 5 percent in the U.K. The Reserve Bank of Australia reduced its cash target to 6 percent, the lowest since November 2006. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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