Nov. 3 (Bloomberg) -- The dollar fell against the euro on speculation President George W. Bush, who leads John Kerry in the race for the U.S. presidency, will struggle to reduce the budget and trade deficits.

The dollar is down 21 percent on the Federal Reserve's Trade- Weighted Major Currency Dollar Index since Bush took office in January 2001. A Bush victory may signal the deficits will widen at a time when foreign demand for U.S. assets is waning, said Jim O'Neill, head of economic research at Goldman Sachs Group Inc.

``The re-election of George Bush is a long-term dollar negative,'' said O'Neill, who is based in London. He predicts the U.S. currency will weaken to a record $1.32 per euro in six months and to 98 versus the yen.

Against the euro, the dollar fell to $1.2797 at 9:15 a.m. in New York, from $1.2744 late yesterday, according to EBS, an electronic foreign exchange trading system, after rising earlier as high as $1.2656. The dollar traded at 106.27 yen, from 106.90, after gaining earlier to 106.90.

Bush currently has 254 of the 270 electoral college votes needed to win, with results from some states still outstanding, according to U.S. television projections. Kerry has 252. While Fox News and NBC News project Bush will win Ohio, with 20 electoral votes, Kerry's campaign said not all votes have been counted, and it refuses to concede the state.

``The market has decided the election is over and we've already had our dollar rally,'' said Kurt Magnus, head of foreign- exchange sales at Westpac Banking Corp. in London. ``The dollar was a sell before the election and it's a sell now. We're back to fundamentals.''

Japanese Currency Sales

Versus the yen, the dollar pared an earlier gain made on speculation Bush will put less pressure on Japan than Kerry to scale back currency sales.

``He is perceived to be less likely to go after Asia in a more robust way to really stop,'' said Rebecca Patterson, a currency strategist at JPMorgan Chase & Co. in New York.

Kerry proposes ``more forceful efforts to stop illegal currency manipulation by China and other countries,'' according to his Web site. China has fixed the yuan to about 8.3 per dollar since 1995, and Japan sold record amounts of yen in the year to March 31 to stem speculation in the currency. Japan hasn't sold since March, Ministry of Finance figures showed.

The U.S. budget deficit swelled to a record $412.6 billion in the fiscal year ended Sept. 30, as war in Iraq and security costs contributed to the third straight annual shortfall under President Bush. Those deficits, which require the Treasury to issue more debt, reversed a trend away from four consecutive surpluses from 1998 to 2001.

`Weaker Dollar'

The current account shortfall increased to $166.2 billion in the second quarter, equivalent to 5.7 percent of the economy, up from 5.1 percent in the first quarter. The current account is a measure of trade, services, tourism and some investments.

The U.S. must attract about $1.8 billion in foreign capital a day to compensate for the current account deficit and maintain the dollar's value, according to Bloomberg calculations.

``It seems like Bush is back in, which means we're back to where we were, which means a weaker dollar,'' said Thanos Papasavvas, director of currency management in London at Credit Suisse Asset Management, which oversees about $310 billion. ``Policies will be unchanged. The budget deficit, which Bush won't look to reduce, will become a critical issue again.''

Foreigners added to their holdings of U.S. securities at the slowest pace in 10 months in August, the Treasury Department said on Oct. 18. The need to finance the current account deficit may force the dollar lower and interest rates higher, according to a report by New York Fed economists published Oct. 28.

To contact the reporter on this story: John Beresford-Peirse at jbpeirse@bloomberg.net

Last Updated: November 3, 2004 09:21 EST