May 22 (Bloomberg) -- The euro rose the most in eight months against the dollar amid speculation traders who bet on its decline amid Europe’s sovereign-debt crisis had to buy back the currency as it strengthened to a one-week high.

Europe’s common currency fell on May 19 to its weakest level in four years a day after Germany banned naked short sales, adding to concern that the region’s leadership may not be able to contain the crisis. The yen gained against all of its 16 major counterparts as the MSCI World Index of shares traded near the lowest since August and the Reuters/Jefferies CRB Index of 19 raw materials fell for a fourth straight week. The greenback fell versus the yen ahead of a report next week that may show U.S. durable goods orders rose in April.

“There’s been a massive short covering,” said Andrew Busch, a global currency strategist at Bank of Montreal in Chicago. “The euro was already stabilizing this week when Germany came in and changed the rules of the game in the middle of the day by banning short sales and created additional uncertainty. The much stronger euro at the end of the week shows you how short people were. A tremendous amount of risk has been taken off the table.”

The euro climbed 1.7 percent, the largest five-day gain since September, to $1.2570 from $1.2358 on May 14. It fell to $1.2144 on May 19, the lowest level since April 2006, before rebounding yesterday to as much as $1.2672, the highest since May 13.

The shared currency dropped 1.1 percent to 113.13 yen, its fourth consecutive decline, from 114.38. The greenback decreased 2.7 percent, the largest decline since February, to 90 yen, from 92.47.

U.S. durable goods orders gained 1.5 percent last month, according to the median forecast in a Bloomberg survey. The Commerce Department’s report is scheduled to be released on May 26 in Washington D.C.

Australia’s dollar this week plummeted 8.5 percent to 74.92 yen and South Africa’s rand dropped 6.5 percent to 11.46 yen as volatility rose to its highest level in more than a year, sapping demand for carry trades, in which investors buy higher- yielding assets with amounts borrowed in nations with low interest rates. Japan’s benchmark of 0.1 percent, less than the 4.5 percent benchmark rate in Australia and 6.5 percent in South Africa, has made the yen popular for funding such transactions.

“People are looking at the volatility levels, and having a re-think whether they want to keep that much risk on the table,” said Aroop Chatterjee, a currency strategist at Barclays Capital Inc. in New York. “Risk reduction continues to be the focus.”

JPMorgan Chase & Co.’s implied-volatility index for six major currencies versus the dollar climbed to as high as 16.95 percent on May 20, the most since April 2009. Increased volatility erodes the profit of carry trades.

German lawmakers approved their country’s share of a $1 trillion euro-region bailout in a vote yesterday, allaying market concern that they would balk at approving a second emergency aid package in as many weeks.

German financial regulator BaFin on May 18 prohibited naked short-selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking investor anxiety about a lack of coordination among European policy makers.

The ban, which took effect on May 19 and lasts until March 31, 2011, also applies to the shares of 10 German banks and insurers, BaFin said in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said.

Dutch Finance Minister Jan Kees de Jager yesterday said Germany’s unilateral move to ban some types of short-selling was “not wise” and a coordinated approach would be better, defying a call for a similar ban in the Netherlands.

The German move “puzzled many investors, as isolated policy moves in financial markets invite regulatory arbitrage,” Steven Englander, head of Group of 10 currency strategy in New York at Citigroup in New York wrote in a report yesterday. “The confusion surrounding the moves, their extent and their cohesiveness remains one of the largest sources of uncertainty in asset markets.”

The Swiss franc this week fell 3.2 percent, the first drop in four weeks, to 1.4449 per euro, prompting speculation that the Swiss National Bank had entered the market to weaken the currency.

“From the price action, it looks like there was some sort of official action,” Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. said on May 19. Central bank spokesman Nicolas Haymoz declined to comment.

The euro rose against the dollar as speculation the Swiss central bank sought to weaken the franc drove traders to cover short positions on concern that the European Central Bank may intervene on the behalf of the shared currency.

On May 18, bets by hedge funds and other large speculators on a decline in the euro were 107,143 contracts more than those anticipating a gain, according to the Commodity Futures Trading Commission, near a record 113,890 contracts reached the prior week.

There is an “elevated threat” the central banks of Europe, the U.S. and Japan will intervene in currency markets though the threshold has not yet been reached, according to Morgan Stanley.

The chance of joint intervention by the Group of Three has increased to 30 percent, above the long-term average of 12 percent, Sophia Drossos, co-head of global foreign-exchange strategy at the U.S. investment bank, wrote in a note to clients. The probability is based on a model that takes into account factors such exchange-rate momentum and market positioning.

“The strongest warning signals in our model have been coming from the pace of euro decline rather than the direction of the move itself,” New York-based Drossos wrote in a note yesterday. “Other indicators in our model suggest euro weakness does not appear out of line with fundamentals or policy preferences.”