The yen may decline for a third day against the dollar as Asian stocks rallied, encouraging investors to sell the currency and buy higher-yielding assets outside Japan.

The currency pared its weekly decline against the dollar after JPMorgan Chase & Co.'s better-than-expected profit in the second quarter eased concern credit-market losses will cut into bank earnings. The dollar trimmed its losses against the euro as crude oil fell to a six-week low.

``Currency traders are likely to take their cue from the stock market,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Earnings season isn't as bad as many had feared. There will be some pressure on the yen to weaken.''

The yen traded at 106.29 per dollar at 9:04 a.m. in Tokyo, little changed from yesterday, when it fell 1 percent, the biggest drop in more than a month. Against the euro, the yen was at 168.46 from 168.58. The dollar traded at $1.5852 versus the euro from $1.5863. It touched the all-time low of $1.6038 on July 15. The yen may decline to 107 per dollar today, Ishikawa forecast.

The pound dropped to 79.36 pence per euro, from 79.16 yesterday, and to $1.9986 from $2.0038 on speculation the U.K. government will increase borrowing as Chancellor of the Exchequer Alistair Darling introduces a new set of spending guidelines.

The Financial Times reported, without citing sources, that the new framework would allow for the breaking of limits on public sector debt. A Treasury spokesman said the report was pure speculation.

Weaker Yen

The yen fell to 14.0725 against the South African rand from 14.0377. It also traded at 103.25 per Australian dollar from 103.33 and at 81.04 versus the New Zealand dollar from 81.12.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan held its target lending rate at 0.5 percent this week, the lowest among major economies. Benchmark rates are 12 percent in South Africa and 7.25 percent in Australia and 8.25 percent in New Zealand.

The Nikkei 225 Stock Average climbed 0.6 percent after the Standard & Poor's 500 Index increased 1.2 percent yesterday on the drop in oil and JPMorgan's earnings. Crude oil for August delivery fell to a six-week low of $129 a barrel before trading at $130.23.

The S&P index lost 3.8 percent in the seven trading days ended July 15 and the dollar touched an all-time low versus the euro that day on speculation a government plan to shore up Fannie Mae and Freddie Mac will fail to restore confidence in the two largest buyers of U.S. home loans.

Extremely Bearish

``We were extremely bearish,'' said Alan Kabbani, senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Now the market is taking some of that bearishness out and becoming a little more confident about the economy and the financial sector.''

Profit at JPMorgan, the largest U.S. bank by market value, fell 52 percent on mortgage-related writedowns and costs from the takeover of Bear Stearns Cos. Second-quarter net income of 54 cents a share compared with expectations for 44 cents in a survey of analysts by Bloomberg.

``While earnings are better than expected, it doesn't remove the fact that the dollar is under pressure and the problems with the financial sector are still present,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York.

The greenback weakened late yesterday versus the euro as Merrill Lynch & Co., the third-biggest U.S. securities firm, reported its fourth straight quarterly loss.

Individual Investors

Japanese individual investors are massively selling the yen whenever it appreciates sharply, said Toru Umemoto, chief currency strategist at the Tokyo unit of Barclays Plc., the third-biggest currency trader.

Yen sales by Japanese individual investors on the Tokyo Financial Exchange reached the highest since August for a second day on July 16 as gains in the yen made higher-yielding assets abroad cheaper. Housewives, pensioners and businessmen stepped up purchases of foreign currencies on that day, as the yen rose to the highest since May 27 against the dollar.

``Japanese housewives are the bane of professional currency traders as they buy foreign currencies on dips,'' said Tokyo- Umemoto. ``Speculative yen-buying by pros tends to lose, as Japan's low rates and weakening economic fundamentals cannot support the yen.''