NEW YORK (Bloomberg) — The yen declined against the euro for the first time in a month and the dollar dropped after the Federal Reserve said the US economic contraction is "somewhat slower", reducing demand for the currencies as a refuge.

The Mexican peso fell against all of its major counterparts on speculation the outbreak of swine flu will extend the nation's economic slump. An index tracking the dollar versus the currencies of six major US trading partners fell for a second week before a US Labor Department report forecast by economists to show employers eliminated fewer jobs in April.

"More and more bears are starting to recognise the green shoots are broadly based," said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. "Money continues coming from the sidelines, which is weighing on the dollar and yen."

The yen dropped 2.3 percent this week to 131.59 per euro, from 128.66 on April 24. It reached 132.35 on Friday, the weakest level since April 14. The yen declined two percent to 99.11 against the dollar, from 97.17 a week earlier. It touched 99.58 on Friday, the weakest level since April 17. The euro appreciated 0.2 percent to $1.3273, from $1.3230.

Australia's dollar gained three percent to 72.40 yen this week as a 9.4 percent rally in the Standard & Poor's 500 Index in April encouraged carry trades. South Africa's rand advanced four percent to 11.60 yen.

"This is a gradual resumption of what will be an upward trend in most of the yen crosses," said Henrik Gullberg, a foreign-exchange strategist in London at Deutsche Bank AG, the world's largest currency trader.

In carry trades, investors get funds where borrowing costs are low and invest where rates are higher. The target lending rate is 0.1 percent in Japan, zero to 0.25 percent in the US, three percent in Australia and 8.5 percent in South Africa.

Mexico's peso slid 3.2 percent to 13.779 versus the dollar, the biggest weekly decline since November. The World Health Organisation expected the number of confirmed worldwide cases, currently at 331, to grow. The agency raised its six-tier pandemic alert to five, bringing it closer to declaring the first influenza pandemic since 1968.

The dollar dropped this week against 13 of its 16 most actively traded counterparts tracked by Bloomberg on reduced demand for safety after a report showing a plunge in US gross domestic product also indicated smaller stockpiles may set the stage for a return to growth in the second half of the year.

The US economy decreased at an annual rate of 6.1 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008, the Commerce Department reported this week. Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.2 percent this week to 84.55. It lost five percent in the past two months.

"As we move into the second half of this year, most of the world's major economies will see the start of a sustainable recovery, and that will spur some dollar weakness as the safe-haven bid comes to an end," said David Powell, a foreign-exchange strategist at Bank of America-Merrill Lynch, in a Bloomberg Television interview.