Dec. 23 (Bloomberg) -- The dollar fell against the euro, nearing a record, and dropped versus the yen on speculation President George W. Bush's administration won't act to stem the U.S. currency's decline into next year.

Moves were exaggerated as financial markets begin a series of year-end holidays. Treasury Secretary John Snow said in a Dec. 3 interview he has ``a deep respect for the way markets perform,'' suggesting he won't accede to European and Asian officials' calls for the U.S. to halt the dollar's slide.

``The U.S. government is happy to see the dollar fall,'' said Shahab Jalinoos, a currency strategist in London at ABN Amro Holding NV. ``Exports become more competitive and it creates jobs,'' he said. ``The big surge in the euro versus the dollar will continue into next year.''

Against the euro, the dollar declined to $1.3453 at 10:47 a.m. in London, from $1.3390 late yesterday in New York, according to electronic currency dealing system EBS. It also fell to 103.91 yen, from 104.23. The dollar is down 6.4 percent against the euro and 3.2 percent versus the yen this year, heading for the third straight annual drop against both.

ABN Amro forecasts the dollar will fall to 90 yen, a level not seen since 1995, and to a record $1.43 per euro by the end of next year. It reached its current record of $1.3470 on Dec. 7.

The euro stayed higher after European Central Bank council member Guy Quaden said the currency's strength this year hasn't been ``too troublesome,'' Belgian magazine Tendances reported. ``The exchange rate has limited the effect of the increase in oil prices,'' he also said in an interview with the magazine.

`Prices Can Jump'

Japanese markets were closed today and the U.S. has a holiday tomorrow. London's markets are closed Dec. 27 and 28. An average $1.9 trillion is traded daily on the global currency market, according to the Bank for International Settlements.

``We're running deeper into a year-end market,'' said Tetsu Aikawa, a currency sales manager at UFJ Bank Ltd., a unit of Japan's fourth-largest bank by assets. ``As the market loses liquidity, prices can jump around a lot.''

The dollar's slide accelerated after it breached so-called stop loss levels where traders had placed pre-set orders to sell the U.S. currency, said Kamal Sharma, a currency strategist at Dresdner Kleinwort Wasserstein in London. Traders place such orders to limit losses in case their bets go the wrong way.

``Smaller flows may have a more significant impact than in a very liquid market and so you might get some periods of volatility like we've seen with the move through $1.34 in euro- dollar,'' Sharma said.

Merrill's Forecast

Merrill Lynch & Co., the top foreign exchange forecaster in the year ended Sept. 30 in Bloomberg Markets' annual rankings, doesn't expect the dollar to reverse course soon.

New York-based Merrill, the world's biggest securities firm measured by total shareholder equity, predicts the dollar will drop to $1.36 per euro by the end of 2005, said Yianos Kontopoulos, 33, London-based global head of currency strategy. The dollar will fall to 91 yen in the same period, he said.

Federal Reserve Chairman Alan Greenspan said on Nov. 19 that foreigners may tire of financing the record U.S. current account deficit and diversify into other currencies or demand higher U.S. interest rates. The dollar and U.S. Treasury securities fell.

A cheaper currency may help narrow the shortfall, which reached a record $164.7 billion in the third quarter, according to figures released on Dec. 16. Snow said in a speech on Nov. 17 in London that the deficit is a ``shared responsibility'' with other countries, which should boost economic growth.

`Start Selling Again'

``The U.S. is quite happy with the weaker dollar,'' said Callum Henderson, head of currency strategy in Singapore at Standard Chartered Plc. ``That's diminishing investor appetite for U.S. assets. From January, we would expect investors to have another look at dollar fundamentals and start selling again.''

Standard Chartered expects the dollar to fall to 98 yen, a level not seen since 1995, and to a record $1.35 per euro by March 2005, Henderson said.

Japan's Finance Minister Sadakazu Tanigaki on Dec. 7 said he understood Europe's concern about the euro's gain and said ``we must take appropriate action,'' to address rapid moves in the yen. German Chancellor Gerhard Schroeder said on Dec. 9 in Tokyo he was concerned about the euro's rise against the dollar.

Japan last sold yen in March. The ECB hasn't sold euros to weaken the currency since its start in 1999. The U.S. hasn't bought or sold dollars to influence exchange rates since September 2000, when it purchased euros ``at the initiative'' of the ECB, the Treasury Department said.

The dollar's three-year decline will probably slow or end in 2005 in part because of expectations the U.S. budget deficit will narrow, said Tony Crescenzi, chief bond market strategist in New York at Miller Tabak & Co.

`Tough Budget'

Bush said on Dec. 20 he'd propose ``a tough budget'' to send a signal to financial markets that he's serious about reducing the federal deficit in his second term. The U.S. government ended its last fiscal year ended Sept. 30 with a record $412 billion budget gap.

``Perceptions in the financial markets about the long-term trajectory of the U.S. budget deficit will almost certainly improve,'' Crescenzi wrote in a report the same day. ``A multitude of factors that have contributed to the three-year decline in the value of the U.S. dollar are likely to reach inflection points in 2005, making it likely the dollar's decline will either slow or halt.''

The U.S. currency is heading for its biggest quarterly decline this year against the euro and the yen, dropping 7.6 percent and 5.6 percent respectively.

To contact the reporter on this story: Jake Lee at jlee127@bloomberg.net

Last Updated: December 23, 2004 05:50 EST