Feb. 5 (Bloomberg) -- The yen may extend gains against the euro after reaching an almost one-year high on expectations European nations’ struggles to reduce deficits will discourage demand for riskier assets.

The yen rallied against all of the most-traded currencies yesterday on speculation investors will reduce carry trades, in which they buy riskier assets with amounts borrowed in nations with low interest rates. The euro fell to its lowest level versus the dollar since May even after European Central Bank President Jean-Claude Trichet said yesterday he’s confident Greece can get its deficit under control and signaled officials have no plans to raise their key interest rate from a record low of 1 percent.

“There was panic selling across riskier currencies as everyone moved to the relative safety of the yen,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut. “There must have been large orders to jump into yen, jump into the dollar.”

Stocks buckled [on] Thursday under the growing belief that the global economy is weaker than many investors expected and is likely to stop the U.S. labor market from rebounding in the coming months.

A flood of bad news, including rising debt levels in European nations and an unexpected jump in the number of Americans filing for unemployment benefits, had investors pulling money out of assets like stocks and commodities that are looking increasingly risky.

Demand for safe haven holdings like the dollar and Treasurys jumped as the euro tumbled. The Dow Jones industrial average fell about 250 points, and all the major indexes were down about 2 percent.

CHICAGO, Feb 4 (Reuters) - Volatility has vaulted out of its slumber.

The worst sell-off in U.S. stocks in more than nine months sent Wall Street's favorite measure of investor anxiety, the Chicago Board Options Exchange Volatility Index .VIX, sharply higher as investors scrambled to protect their portfolios.

The so-called VIX jumped nearly 21 percent to 26.08 as U.S. stocks sank amid persistent fears over European sovereign debt problems and an unexpected increase in U.S. jobless claims.