Bloomberg-- The yen dropped from a 15-year high against the dollar after improved demand for European bonds eased concern the region’s debt crisis is worsening and as speculation mounted the Japanese government may move to curb the currency’s strength.

The euro gained after demand rose at a Portuguese bond sale and Poland’s auction of five-year debt attracted the strongest bids since 2008. The yen fell against a majority of the 16 most- traded currencies after Japan’s Finance Minister Yoshihiko Noda said he is prepared to take “bold” steps on currencies if necessary. A Federal Reserve business survey found the economic rebound showed signs of slowing.

“The Dow is up, which was negative for the safe haven currencies today,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., world’s largest custodial bank, with more than $20 trillion in assets under administration.

The yen fell 0.1 percent to 83.92 at 4:03 p.m.in New York, after touching 83.35, the strongest level since May 1995. The dollar declined 0.3 percent against the euro to $1.2716.

The Standard & Poor’s 500 Index rose 0.7 percent, reflecting reduced concerns about a slowing economy. It declined 1.2 percent yesterday.

The Canadian dollar gained as the Bank of Canada raised its benchmark interest rate by a quarter-percentage point to 1 percent. The loonie, as the Canadian currency is known, added 1 percent to C$1.0374 per U.S. dollar.

Swiss Strength

The Swiss franc traded near a record high against the euro. The franc declined 0.4 percent to 1.2871 against the euro, after touching 1.2766, the strongest since the single currency’s 1999 inception. It earlier touched 1.0061 per dollar, approaching parity with the greenback for the first time in nine months.

Portugal sold 1.04 billion euros of bonds maturing in 2013 and 2021. The 2021 securities drew bids for 2.6 times the amount offered, compared with a bid-to-cover ratio of 1.6 in the March sale.

European central banks bought Greek, Irish and Portuguese bonds, according to a trader involved in the transactions, as the securities’ premiums to German debt surged for a third day.

The premium investors demand to hold Portuguese 10-year bonds instead of benchmark German bunds reached a record 372 points yesterday before trading at 350 basis points today.

Market Moves

“They’re trying to make sure that the markets remain liquid,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. “Even though spreads have been widening out, they’ve kept low purchases because they’ve felt that markets are actually working. There is two way flow, the markets are not seizing up.”

The euro may drop 4 percent to a level against the dollar last reached in July if a support level is breached, according to Citigroup Inc.

If the euro falls below the support level of $1.2588, it could drop as low as $1.22, Tom Fitzpatrick, chief technical analyst at Citigroup in New York, wrote in a research note to clients. That level was last touched on July 1. Resistance for the euro can be found at $1.2923, he wrote.

The U.S. economy maintained its expansion while showing “widespread signs of a deceleration” in mid-July through the end of August, according to a survey by 12 regional Fed banks.

The report underscored the Fed’s view that while the recovery from the worst recession in seven decades has cooled, the economy isn’t relapsing into a contraction. In a speech last month in Jackson Hole, Wyoming, Fed chairman Ben S. Bernanke said “the preconditions for a pickup in growth in 2011 appear to remain in place.”

“The Fed’s beige book was consistent with the last Federal Open Market Committee announcement,” said Amelia Bourdeau, a currency strategist in Stamford, Connecticut, at UBS AG. “There is some growth in the economy, but there are signs of the growth decelerating.”

Yen Trade

The yen has advanced 16 percent this year, the biggest gain among the developed-world currencies, according to Bloomberg Correlation-Weighted Currency Indices. The euro has dropped 10 percent and the dollar is up 2.7 percent.

Japan’s current-account surplus expanded 26 percent from a year earlier to 1.68 trillion yen ($20 billion), the Ministry of Finance said, surpassing the 1.53 trillion yen surplus forecast by economists in a Bloomberg News survey.

Gains in the yen were reversed after Finance Minister Noda told reporters in Tokyo the government is watching markets closely and potential measures to counter the yen’s appreciation include intervention.

“There may have been some players who sold the yen on his comments,” said Hisanao Sasaki, vice president of foreign exchange at Oversea-Chinese Banking Corp. in Singapore.

Japan hasn’t intervened in the foreign-exchange market since 2004, when the currency was at about 109 per dollar.

Aussie Performs

The pound and the Australian dollar were among the best performers among the 16-most traded currencies. A gauge of U.K. house prices unexpectedly rose in August and manufacturing expanded for a third month in July.

The pound appreciated 0.4 percent to 82.22 pence against the euro after reaching 82.02 pence, the strongest level since Aug. 31.

The Aussie reached a one-month high versus the greenback before a report tomorrow forecast to show employers added positions for a sixth month, increasing pressure on the central back to resume raising interest rates.

Australia’s dollar rose 0.7 percent to 91.72 U.S. cents from 91.06 cents yesterday, after reaching 91.94 U.S. cents, the highest level since Aug. 9.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net