Feb. 14 (Bloomberg) -- The dollar fell by the most in almost three weeks against the yen after a government report showed Japan's current-account surplus unexpectedly swelled in December.

``Traders sold the dollar against the yen as soon as they saw the trade surplus figure,'' said Steve Barrow, a currency strategist in London at Bear Stearns Cos. ``The momentum has now shifted negatively for the dollar.''

The dollar also dropped by almost a cent against the euro after the Commodity Futures Trading Commission said late on Feb. 11 that speculators closed bets against the U.S. currency last week. The report suggests traders can buy euros with less concern sales by hedge funds will cause their bets to go wrong, said Rizwan Din, a currency strategist at Barclays Capital in London.

Against the yen, the dollar slid 0.6 percent to 105.04 at 10:25 a.m. in New York, from 105.71 late Feb. 11, the biggest loss since Jan. 26, according to electronic currency-trading system EBS. It also weakened to $1.2956 per euro, from $1.2866. Barrow predicts the dollar will fall to 90 yen by year-end.

Japan's surplus in the current account, the broadest measure of trade, widened 28 percent in December to 1.78 trillion yen ($17 billion). The median forecast in a Bloomberg survey was for the surplus to stay at November's 1.39 trillion yen. The growth came as Japanese investors brought home proceeds of investments in higher-yielding U.S. bonds and as oil imports fell.

``That's when people started buying the yen in Asia,'' said Scott Schultz, a currency trader in New York at Brown Brothers Harriman & Co. ``People are again a little more bullish on the yen. The dollar rally against the euro and yen is probably over for now.'' The U.S. currency is up 4.5 percent this year versus the euro and 2.3 percent against the yen.

U.S. Current Account

The U.S. current account had a record deficit in the third quarter, the most recent data show. The $164.7 billion gap means the U.S. must attract about $1.8 billion every day to compensate for the shortfall and maintain the dollar's value, according to Bloomberg calculations.

Hedge funds and other large speculators last week bet on the dollar to advance against the euro and the yen, the CFTC reported. The difference in the number of wagers on a gain against the euro compared with that on a decline -- so-called net longs -- was 631 on Feb. 8, the CFTC said. A week before, speculators had net shorts of 1,925, the data show.

Speculators have had a net-long bet on the dollar against the euro only twice before in the past three years, the commission's weekly data show. On each prior occasion, the dollar fell about three-quarters of a cent on the trading days following the report's release.

`Contrary Indicator'

``This is used as a contrary indicator and it shows the market is positioned to buy dollars, so the risk is that the market could go the other way,'' said Din at Barclays. ``It's a good time to put on dollar shorts.''

Demand for the euro rose after two European Central Bank officials suggested policy makers are concerned inflation may accelerate. ECB Vice President Lucas Papademos said risks to price stability have increased recently, though inflationary pressure isn't building up yet, the Handelsblatt business newspaper reported.

ECB council member Arnout Wellink said he's worried about rising house prices in some of the 12 countries that share the euro, Financial Times Deutschland said, citing an interview. The ECB has kept its benchmark interest rate at 2 percent, a six- decade low for the euro region, since June 2003.

`Expressing Concern'

``The ECB is expressing concern over house-price growth and this makes the market nervous as despite weakening unemployment, maybe one day a rate hike will come,'' said Shahab Jalinoos, a currency strategist at ABN Amro Holding NV in London. ``That supports the euro.''

ABN forecasts the dollar will fall to $1.36 per euro and to 100 yen in three months.

Demand for the euro may also gain after General Motors Corp. agreed to pay Fiat SpA 1.55 billion euros ($2 billion) to avoid buying the unprofitable auto unit of Italy's largest manufacturer, said Barrow at Bear Stearns.

``This deal could give the euro some support against the dollar,'' Barrow wrote in a morning report to clients. Detroit- based GM reached agreement with Turin, Italy-based Fiat two days ago.

The dollar also declined on concern a government report tomorrow will show falling foreign purchases of U.S. financial assets, said Craig Ferguson, currency strategist in Melbourne at Australia and New Zealand Banking Group.

Net foreign purchases of U.S. stocks, corporate bonds, Treasuries and other financial assets may have dropped to $60 billion in December from a five-month-high of $81 billion in November, Ferguson said.

`Expecting a Reversal'

``We're expecting a reversal in the dollar'' this week, after four straight weeks of gains for the U.S. currency against the euro, Ferguson said. The U.S. currency may fall to 103.50 yen and $1.30 per euro this week, he said.

A Bloomberg survey of 48 traders, strategists and investors also indicated the U.S. currency will decline for the first week in five against the euro. Forty-eight percent of the 48 traders, strategists and investors polled from Sydney to New York on Feb. 11 advised selling the dollar against the euro, up from 25 percent a week earlier.

Dresdner Kleinwort Wasserstein, RBC Capital Markets and Calyon, the securities unit of Credit Agricole SA, all project a decline in net foreign purchases of U.S. assets for December. The Treasury will release the monthly figures on foreign investment at 9 a.m. tomorrow in Washington.

The average daily move in the dollar against the euro on the day of the report was almost three quarters of a cent in 2004, based on Bloomberg calculations.

Yen May Reach 95

Seasonally adjusted income from Japan's overseas investments rose 18 percent from the previous month to 949 billion yen, today's Ministry of Finance report showed. Japan is the largest foreign holder of U.S. Treasuries, owning $714.9 billion as of November, according to Treasury data.

Japan's currency will probably advance past 100 per dollar this year as concern about a record U.S. current-account gap undermines demand for the U.S. currency, Tomoya Masanao, a portfolio manager at Pacific Investment Management Co. in Tokyo, said in an interview published today.

``Dollar-yen can trade around the mid-90 level, let's say 95 this year,'' said Masano, whose Newport Beach, California-based firm manages the world's biggest bond fund, with $415 billion.

To contact the reporter on this story: Jake Lee in London at jlee127@bloomberg.net; Joshua Krongold in New York at jkrongold2@bloomberg.net.

Last Updated: February 14, 2005 10:32 EST