NEW YORK (Bloomberg) — The dollar climbed to a two-and-a-half-year high against an index of currencies of six major US trading partners as a plunge in global stocks increased demand for the relative safety of government debt.

The yen increased versus the euro, the dollar, the Brazilian real and the Mexican peso this week on speculation investors will sell higher-yielding assets and pay back low-cost loans in Japan's currency. The Swiss franc fell to the lowest against the dollar since June 2007 as the central bank unexpectedly halved the target lending rate.

"We've swung significantly back toward risk aversion, so it's not surprising that the dollar has climbed higher," said Todd Elmer, a currency strategist at Citigroup Global Markets in New York. "This trend has significant room to run moving forward and is likely to continue to drive the dollar higher in the weeks ahead."

The dollar rose 0.1 percent to $1.2587 per euro, from $1.2605 on November 14. The yen climbed 1.2 percent to 95.96 versus the dollar from 97.14. It strengthened 1.4 percent to 120.71 against the euro from 122.39.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden's krona, rose for a third week. It touched 88.463 yesterday, the highest level since April 2006.

The Australian dollar declined for a second week, dropping 2.4 percent to 63.24 US cents, trading near a five-year low. The Aussie lost 16 percent last month even as the central bank bought A$3.15 billion ($1.96 billion) of its currency in October, the biggest net purchase on record.

The franc depreciated for a third week against the dollar, touching 1.2298, the weakest in more than a year. The Swiss National Bank reduced its target for three-month Libor to one percent from two percent in the third unscheduled move since the beginning of October.

South Korea's won reached 1,524.50 against the dollar, the weakest level since the Asian financial crisis a decade ago. The currency wiped out the 14 percent rally it recorded after a $30 billion swap agreement with the Federal Reserve on October 30.

The yen increased 11 percent to 38.75 against the real and 8.1 percent to 6.88 versus the peso this week on bets investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan kept its target lending rate on Friday at 0.3 percent, compared with 13.75 percent in Brazil and 8.25 percent in Mexico.

"There's strong possibility that the yen will continue appreciating as the global recession may deepen," said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. "It's an environment where losses in cross-yen currencies are likely to be even bigger than those in the dollar-yen."

In a sign a stronger yen is taking a toll on corporate profits, Nikkei English News reported this week that Canon Inc., the world's largest camera maker, will move its inkjet printer assembly operations from Japan to Thailand in 2010.

Japan's currency will advance to 87 against the dollar and 103 per euro by year-end, according to JPMorgan.

The dollar may weaken as foreign investors demand higher returns for Treasuries, according to James Dutkiewicz, who manages C$5 billion ($3.9 billion) in fixed-income assets in Toronto at CI Investments Inc.