NEW YORK (Bloomberg) — The yen strengthened the most against the dollar in almost 15 months this week as falling stock markets prompted investors to unwind trades they had financed by borrowing the Japanese currency.Investors exited the so-called carry trade as they cut their appetite for riskier assets in emerging markets and moved into US government debt. Investors have taken advantage of the lowest interest rate among major economies in Japan to borrow yen and buy higher-yielding assets elsewhere.

“Traders continued to liquidate their carry trade positions,” said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. “The yen is the market leader now, and other currencies are under pressure.”

Japan’s currency gained 3.7 percent this week, the biggest increase since the period ended December 16, 2005, to 116.80 per dollar on Friday, from 121.08 on February 23. It reached 116.43 yesterday, the highest since December 11. The yen rose 3.5 percent to 154.10 per euro from 159.38 at the end of last week. The 13-nation currency has fallen from a record 159.65 yen on February 23.

The dollar declined against the euro for a fifth week, losing 0.2 percent to $1.3192 from $1.3166 on February 23. US durable goods orders fell during January, new-home sales tumbled by the most in 13 years and the government lowered its estimate for fourth-quarter economic growth, reports showed this week.

Japan’s 0.5 percent benchmark interest rate is the lowest among industrialised nations. South Africa, with borrowing costs at 9 percent, had the worst-performing currency, losing 8.2 percent against the yen.

Japan’s interest rate compares with 5.25 percent in the US and UK, 3.5 percent in Europe and 7.25 percent in New Zealand. At 2 percent, Switzerland has the second-lowest borrowing costs among developed nations.

Proposed regulatory changes in the Chinese equity markets sparked a rout stocks world-wide as investors became risk averse. US stocks posted their worst week in four years, erasing all of the gains for 2007 on Dow Jones Industrial Average, Standard & Poor’s 500 Index and the Nasdaq Composite Index.

The sell-off in stocks helped fuelled a 6.4 percent weekly gain in the yen against the New Zealand dollar, and a 5.8 percent advance versus the Brazilian real.

“The move we’ve seen has nothing to do with the economic fundamentals,” said Lara Rhame, a senior currency strategist at Credit Suisse Group in New York. “It’s the animal spirit of the market. We will probably see more unwinding of yen carry trade in the short term.”

Hiroshi Watanabe, Japan’s top currency official, said on March 1 that he sees only “limited” effects from the unwinding of carry trades.

The Swiss franc, another currency that is used to fund carry trades, posted a fifth weekly gain versus the dollar. It traded at 1.2165 against the US currency yesterday, from 1.2326 a week ago.

Lehman Brothers Holdings Inc. is recommending clients buy the Swiss currency versus the US and Australian dollars. Lehman, the fourth-largest securities firm, is also telling investors to remain short in the South African rand. A short position is a bet against a currency.