(Bloomberg) -- The yen rose against the dollar and euro after a report showed a slump in Japan’s exports slowed in March, adding to signs the worst of the recession may be over.

The pound fell against all of the other major currencies as Chancellor of the Exchequer Alistair Darling said the U.K. will borrow 269 billion pounds ($392 billion) more than previously forecast and increase income taxes as the worst slump since World War II saps revenue. The Australian dollar weakened against the greenback as annual inflation slowed, giving the central bank more room to lower interest rates.

“The focus was on yen outperformance,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “The downward spiral of trade starts to abate here.”

The yen advanced 0.7 percent to 98.02 per dollar at 4 p.m. in New York, from 98.73 yesterday. The yen gained 0.3 percent to 127.39 per euro from 127.81 yesterday, when it reached 126.09, the strongest level since March 16. The dollar depreciated 0.4 percent to $1.2996 per euro from $1.2948. It earlier climbed to $1.2886, the strongest level since March 16.

Traders sold the pound for the euro, boosting demand for the 16-nation currency and pushing it up versus the dollar, according to Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

Japan’s currency traded near a five-week high versus the euro after a government report showed the nation’s overseas shipments fell 45.6 percent last month from a year earlier, compared with February’s unprecedented 49.4 percent plunge. Economists in a Bloomberg survey predicted a 46.4 percent drop.

Weaker Pound

The pound fell 1.2 percent to $1.4495 as Darling told Parliament in London that the U.K. economy will shrink by 3.5 percent this year, more than twice the estimate in November. Against the euro, the pound dropped 1.7 percent to 89.72 pence.

The U.K.’s deficit will total 703 billion pounds during five fiscal years through April 2014, compared with 434 billion pounds forecast in November, Darling said in his annual budget statement to Parliament in London. This year’s shortfall of 175 billion pounds, or 12.4 percent of gross domestic product, is the biggest in the Group of 20 nations and more than the 12 percent expected in the U.S.

Darling increased the tax on people earning more than 150,000 pounds a year to 50 percent and withdrew breaks for pension contributions for that bracket.

Bullish No More

“I am turning 180 percent on my sterling-bullish call,” Neil Jones, head of European hedge fund sales in London at Mizuho Corporate Bank Ltd., wrote in a research note to clients. “Investment will exit the U.K. economy in search of lower tax regimes.”

The dollar fell yesterday against the euro after Treasury Secretary Timothy Geithner told a congressional panel the “vast majority” of U.S. banks have more capital than needed, reducing demand for the safety of the world’s main reserve currency.

Global policy makers may need to alter their strategies to combat the financial and economic crisis as conditions “evolve,” Geithner said in a speech today.

The Federal Reserve plans to release results of stress tests on banks on May 4. The tests are being used to determine whether the companies have enough capital to cover losses over the next two years should the recession worsen.

Worldwide losses tied to loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and the credit crisis exact an increasing toll on financial institutions, the International Monetary Fund said yesterday.

IMF Outlook

The Washington-based IMF said in a new forecast released today that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent projection.

“The IMF’s gloomy prognosis is an added factor helping to define the risk-appetite environment,” Steve Pearson, a London- based currency strategist at Bank of America-Merrill Lynch, wrote in a note today. “This is leaving foreign-exchange price action biased toward dollar and yen outperformance.”

Australia’s dollar weakened 0.6 percent to 70.74 U.S. cents and 1.2 percent to 69.39 yen after a report showed the nation’s consumer price index rose 2.5 percent in the first quarter from a year earlier, after gaining 3.7 percent in the fourth quarter.

“With inflation working lower, they would be able to keep interest rates at low levels for a prolonged period,” said Savanth Sebastian, an economist at Commonwealth Bank of Australia in Sydney. “We are penciling in at least one more rate cut.”

Canadian Dollar

The Canadian dollar dropped 0.2 percent to C$1.2387 versus the greenback before policy makers issue a report tomorrow that may pave the way for quantitative easing, in which a central bank prints money to buy debt assets and stimulate lending.

Investors should buy the Canadian dollar because speculation the nation’s central bank may debase the currency with quantitative easing is likely overblown, according to Bank of Tokyo-Mitsubishi UFJ Ltd.

“Given other quantitative-easing currency performances and given that quantitative easing in Canada is likely to be very mild, if introduced at all, we believe current U.S. dollar- Canadian dollar levels offer good selling opportunities for an eventual break below C$1.20,” Derek Halpenny, the bank’s London-based European head of global currency research, wrote today in a note to clients.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net