By Lukanyo Mnyanda and Yoshiaki Nohara Jan. 28 (Bloomberg) -- The yen and dollar declined against higher-yielding currencies as stocks rose after the Federal Reserve said the U.S. economy is in a recovery. The currencies dropped versus the New Zealand and Australian dollars after the Fed gave its assessment and President Barack Obama proposed tax incentives to boost the U.S. economy yesterday. The euro touched a level below $1.40 for a second day after a former adviser to China’s central bank said the nation shouldn’t buy Greece’s debt. “There’s a bit more risk appetite, and the yen is the currency that reacts the most to changes in perception,” said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “The Fed was a bit more optimistic, and this is also good for risk appetite.” The yen traded at 126.32 per euro at 6:56 a.m. in New York, compared with 126.25 yesterday. The dollar increased 0.3 percent to 90.23 yen, from 90 yesterday, when it dropped to 89.14, the lowest level since Dec. 18. The dollar traded at $1.4004 per euro, compared with $1.4024, after reaching $1.3938, the strongest level since July 14. The Federal Open Market Committee upgraded its economic outlook yesterday and reaffirmed it will end a $1.25 trillion program to buy mortgage-backed securities. Policy makers reiterated that borrowing costs will stay at record lows for an “extended period” and held the target rate at zero to 0.25 percent. Kansas City Fed President Thomas Hoenig dissented, saying it’s time to change the promise to keep rates so low. ‘Relatively Hawkish’ “With Hoenig sounding relatively hawkish, they are a bit more upbeat than people had expected,” said Danica Hampton, a senior strategist at Bank of New Zealand Ltd. in Wellington. The New Zealand dollar gained 0.8 percent to 71.21 U.S. cents and was 1.1 percent stronger at 64.28 yen. Australia’s dollar appreciated 0.7 percent to 90.18 U.S. cents and increased 0.9 percent to 81.34 yen. Benchmark interest rates are 2.5 percent in New Zealand and 3.75 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in so- called carry trades is that currency fluctuations will erase profits. Europe’s Dow Jones Stoxx 600 Index added 0.9 percent, headed for its biggest gain since Jan. 4. Futures on the Standard & Poor’s 500 Index added 0.3 percent, while the MSCI Asia Pacific increased 0.8 percent. Japan’s Retail Sales The yen also weakened as a report showed Japan’s retail sales unexpectedly fell in December for a 16th month. Sales in the world’s second-largest economy slid 0.3 percent from a year earlier, the Trade Ministry said today in Tokyo. The median estimate of 12 economists in a Bloomberg News survey was for a 0.3 percent gain. The retail report adds “to the negative sentiment” toward the yen, said Niels Christensen, a currency strategist at Nordea Bank AB in Copenhagen. “Positive risk appetite is putting pressure on the yen.” U.S. durable-goods orders rose 2 percent in December after dropping a revised 0.7 percent in the prior month, according to the median forecast of 70 economists in a Bloomberg News survey. Initial jobless claims fell to 450,000 last week from 482,000 in the prior week, another survey showed. Reports from the government are due at 8:30 a.m. New York time. Obama, delivering his first State of the Union address in Washington yesterday, called for an extension of tax incentives worth $38 billion over this year and next to spur businesses to accelerate equipment purchases. He also called for elimination of capital-gains taxes on small-business investments. Euro Versus Pound The euro fell to a five-month low versus the pound on concern Greece and other countries in the euro area will struggle to cut their budget deficits, supporting the case for the European Central Bank to maintain its 1 percent benchmark interest rate. The European Commission said in a report yesterday finance ministers agreed Greece ‘‘had not taken effective action to correct the deficit by the 2010 deadline agreed at the beginning of 2009.’’ Portugal’s 2010 budget plan may not be enough to achieve the pledge of trimming the deficit by more than half in three years, risking a cut in its credit rating, economists and bond analysts said. Greece has a lower debt rating than the U.S., and its statistics have been “sharply” criticized by the European Commission, Yu Yongding, a former adviser to the Chinese central bank and now a member of the state-backed Chinese Academy of Social Sciences, said by e-mail. China shouldn’t buy a “large chunk” of Greek bonds, Yu said in response to questions. “Let European governments and the European Central Bank rescue Greece.” The euro decreased 0.6 percent to 86.21 pence, from 86.73 pence, after dropping to 86.13 pence, the lowest since Aug. 20. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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