By Matt Townsend and Lukanyo Mnyanda Oct. 23 (Bloomberg) -- The dollar gained the most against the pound in a month as the U.K.’s economy unexpectedly contracted in the third quarter, giving the Bank of England more reason to expand emergency measures to spur growth. The yen dropped to a two-month low against the euro as improved corporate earnings drove stocks higher, adding to evidence of a global economic recovery and fueling demand for higher-yielding currencies. Japan’s currency headed for a weekly decline versus 13 of its 16 most-traded counterparts. “The U.K. is showing it’s a laggard compared to the rest of Europe,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “They might have to extend quantitative easing. The pound is the big mover today.” The dollar rallied 1.5 percent to $1.6386 per pound at 9:15 a.m. in New York from $1.6624 yesterday. The Japanese currency declined to 91.85 per dollar, from 91.30. The greenback was little changed at $1.5023 per euro. The yen depreciated to 137.98 per euro and earlier traded at 138.04, the weakest level since Aug. 10. The median forecast of analysts and strategists’ predictions compiled by Bloomberg is for Japan’s currency to end the year at 90 per dollar and 135 against the euro. “Risk appetite in general is growing and that explains why the yen is losing ground,” said Toshi Honda, a strategist in London at Mizuho Corporate Bank Ltd. “In that context, strong growing risk appetite, given strong commodity prices and equity markets across the board, should weigh on the yen.” Stock Gains Europe’s Dow Jones Stoxx 600 Index added 0.4 percent, extending its rebound since March 9 to 57 percent after the Munich-based Ifo institute’s said it business climate index, based on a survey of 7,000 executives, climbed to 91.9 in October from 91.3 in the previous month. Sales of existing homes in the U.S. rose in September to an annual rate of 5.35 million, a two-year high, according to the median forecast of 76 economists in a Bloomberg survey. The report from the National Association of Realtors is due at 10 a.m. in Washington. The pound fell the most in a month against the euro and declined versus the dollar after the Office for National Statistics said U.K. gross domestic product dropped 0.4 percent in the third quarter from the second. Economists predicted a 0.2 percent increase in a Bloomberg News survey. The economy has now contracted in six quarters. The British currency declined to $ 91.78 pence per euro, from 90.44 pence yesterday. ‘Massive Shock’ “This is a massive shock for the markets,” Lee McDarby, head of dealing in London at Investec Bank Plc’s treasury solutions unit, wrote in a note. “Clearly this is not good news, with the U.K. economy one of the last still in recession.” The yen headed for a third weekly drop against the Australian and New Zealand dollars as investors speculated the South Pacific nations will increase interest rates faster than other developed countries. Benchmark interest rates are 3.25 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., making the higher-yielding currencies favorites for so-called carry trades. The risk in such trades is that currency market moves will erase profits. Australia’s dollar rose to 84.85 yen, from 84.61 yen yesterday, for a 1.9 percent gain this week. New Zealand’s dollar climbed to 69.33 yen, for a 3 percent advance in the week. Profits Top Estimates Better-than-expected earnings are boosting speculation the global recession is coming to an end. Profits have topped estimates at 79 percent of the companies in the S&P 500 that have released results, according to Bloomberg data. That would mark the highest proportion in data going back to 1993. The dollar was little changed versus the euro even as the European currency’s 14-day relative strength index above 70 for the first time in more than a month. A reading of 70 typically signals a change in price direction is imminent. “The recent bout of euro strength is now looking to be over-stretched, given huge accumulation of short positions on the dollar,” said Soichiro Mori, manager of foreign-exchange promotion at FXOnline Japan Co., a margin-trading company. “A rise in the euro beyond the $1.50 level may elicit a sterner warning from European policy makers against the appreciation of their currency.” In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. A short position is a bet an asset will decline. Won Wins South Korea’s won was the biggest gainer against the dollar, yen and euro among the 16 most-traded currencies as the nation’s expanding economy and improving corporate earnings helped draw funds from abroad. “The fundamentals remain supportive of the stock market and the won,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “It seems that the global economy is on the mend and South Korea has been leading the turnaround in the region.” The won climbed 0.7 percent to 1,181.25 per dollar, according to data compiled by Bloomberg. The currency yesterday touched 1,192.75, the weakest level since Sept. 29. Investors are the most bullish on the yuan in 14 months as China’s exporters say the currency’s link to the slumping dollar is helping revive sales. Contracts based on expectations for the currency’s value a year from now show the yuan will appreciate 2.8 percent, compared with estimates for 0.5 percent two months ago, data compiled by Bloomberg show. Twelve-month non-deliverable forwards touched 6.5440 per dollar on Oct. 20, the strongest level since August 2008. They were at 6.6384 yesterday, compared with a spot exchange rate of 6.8274 today.

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