June 3 (Bloomberg) -- The yen weakened against the dollar and the euro in London after Japan's Nikkei 225 Stock Average fell the most in three weeks and crude oil futures rose.

The Nikkei 225 lost 1.9 percent as crude oil futures added as much as 1.8 percent. Oil futures, which yesterday dropped by the most in six months, rose on concern about delays before increased OPEC output reaches markets. Japan imports all its oil.

``The oil price is overhanging the currency market at the moment,'' said Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc. ``Those countries that are net importers of oil such as Japan tend to suffer the most.''

Japan's currency dropped to 110.56 per dollar at 9:21 a.m. in London from 109.88 late yesterday in New York, according to EBS, an electronic foreign-exchange dealing system. It fell to 134.93 per euro from 134.21. Against the euro, the dollar rose to $1.2205 from $1.2216.

The yen may fall as low as 112 per dollar in the next month, said Robson at Royal Bank of Scotland, the ninth-largest trader in the $1.2 trillion-a-day currency market, according to a survey by Euromoney magazine.

Crude oil futures rose as traders bet increased production pledged by some OPEC members will take several weeks to reach markets and ease concern about fuel shortages. Officials from the OPEC member countries will meet today in Beirut.

Crude oil for July delivery rose as much as 89 cents, or 2.2 percent, to $40.85 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It yesterday had its biggest decline since Nov. 24.

Service Industries

The euro stayed lower even after a report showed that service industries in the euro region expanded for an 11th month in May. An index based on a survey of 2,000 purchasing managers compiled for Reuters Group Plc by NTC Research Ltd. rose to 55.8 from April's 54.5.

The dollar is drawing some support from expectations that a report tomorrow will show U.S. companies added 225,000 workers to their payrolls last month, said analysts including Hans Guenter Redeker, head of currency strategy in London at BNP Paribas SA.

``I wouldn't exclude the dollar being stronger over the next day or two as investors prepare for a strong jobs number,'' said Redeker. The dollar may gain to $1.2105 per euro in coming days, BNP, France's largest bank, forecasts

Fed officials have said they want to see more job creation before the central bank increases its key rate from 1 percent.

Jobless Claims

A separate report today from the Labor Department will probably show first-time U.S. jobless claims applications fell to 335,000 from 344,000 the week before, according to the median of 36 forecasts in a Bloomberg News survey.

A gauge of U.S. manufacturing unexpectedly rose last month, an industry report showed yesterday. A report today will probably show an index measuring the services part of the U.S. economy stayed close to a record high in May.

Fed Chairman Alan Greenspan said in a letter dated May 14 to Senator Paul Sarbanes, a Maryland Democrat, that today's low interest rates ``must be returned to a more neutral setting at some point.''

The Fed's key interest rate is at 1 percent, half that offered by the European Central Bank. The ECB will probably keep its interest rate at 2 percent today, all 27 economists surveyed by Bloomberg News said.

Chinese Economy

The Nikkei's drop accelerated, weighing on the yen, amid speculation China may rise interest rates to cool the economy, Japan's second-largest export destination.

China will in the next few weeks announce plans to raise interest rates and electricity prices to cool an overheating economy, the South China Morning Post reported today, citing unidentified mainland officials.

China's central bank denied the report. ``We have no plans to adjust our interest rates,'' said Bai Li, a central bank official. ``If you listen closely to what our leaders have been saying of late, you wouldn't get the impression we plan'' to raise rates.

``Speculation of China's rate increase helped to pressure stocks, which led to yen selling,'' said Shohgo Nagaya, manager of the foreign exchange section at Nomura Trust and Banking Co. in Tokyo.

The yen's decline may stall on speculation the world's second-biggest economy will extend a recovery, helping to lure overseas investors, and after a Ministry of Finance data showed foreign investors returned to be net buyers of Japanese shares.

Overseas investors bought 233.7 billion yen ($2.1 billion) of Japanese shares during the week ended May 27, their first net purchases in four weeks, according to the ministry data.

``The market is very sure of the Japanese economic recovery,'' said Philippe Gernez, regional head of foreign exchange and derivatives in Singapore at Natexis Banques Populaires, part of France's fifth-biggest lender.

To contact the reporter on this story: Richard Blackden in London at rblackden@bloomberg.net

Last Updated: June 3, 2004 04:31 EDT