NEW YORK (Bloomberg) — The dollar declined the most since May versus six major counterparts as the greenback became the cheapest funding currency, prompting investors to sell the dollar and buy riskier assets.

Sterling rose this week to a one-month high versus the dollar as the central bank refrained from expanding its asset-purchase programme. The yen appreciated to near 90 versus the dollar before next week's Bank of Japan meeting on speculation China's recovery will boost the growth of its Asian neighbours and Japan's exporters will repatriate earnings.

"The use of the dollar as a funding currency is understandable given how liquid the dollar is in terms of its ability to trade across foreign-exchange markets," said Nick Bennenbroek, head of foreign-exchange strategy at Wells Fargo & Co. in New York. "That's probably why it's being taken advantage of right now."

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of US trading partners including the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped two percent to 76.608 on Friday, from 78.136 on September 4. The decline was the biggest since a 3.7 percent reduction in the five days ended May 22. The gauge touched 76.457, the lowest since September 25, 2008.

The US currency's decline didn't discourage investors from buying Treasuries this week. Thirty-year US bonds advanced, pushing the yield down 0.1 percentage point to 4.17 percent, after the $12 billion of the securities offered September 10 drew the strongest demand in almost two years.

The yen advanced to a seven-month high versus the dollar as China's output increased 12.3 percent in August from a year earlier and on speculation Japanese companies are bringing back money earned abroad to take advantage of a tax break that went into effect this fiscal year.

The Japanese currency gained against most of its major counterparts as it surpassed a support level at 92 yen per dollar, said Boris Schlossberg, director of currency research at online currency trader GFT Forex, in New York. Support is a technical-chart area where orders may be clustered.

"It's a momentum move," Schlossberg said. "We broke the 92 handle, which was a pretty critical support area. There was a tremendous amount of stops below there, and once that gave way it was like a waterfall cascade and pushed everything lower."

The Bank of Japan is forecast by all of the eight economists surveyed by Bloomberg News to hold the target lending rate next week at 0.1 percent.

The yen advanced 2.5 percent to 90.71 versus the dollar and reached 90.21, the strongest level since February 12. Japan's currency gained 0.6 percent to 132.17 yen per euro. The euro increased 1.9 percent to $1.4571 after reaching $1.4634, the strongest level since December 18.

The three-month London interbank offered rate, or Libor, for dollars dropped below that of the Swiss franc on September 8 for the first time since November, making the greenback the cheapest currency to fund purchases of higher-yielding assets. The dollar rate ended the week at a record low of 0.299 percent, compared with 0.359 for the yen and 0.307 for the franc.

The franc gained 2.3 percent to 1.0373 versus the dollar and touched 1.0340, the strongest level since July 29, 2008.