Jan. 9 (Bloomberg) -- The dollar may fall against the euro and yen for a second day as investors raised bets the Federal Reserve will lower its benchmark interest rate a half-percentage point this month.

The U.S. dollar yesterday fell versus 10 of 16 most- actively traded currencies after a report showed U.S. pending home sales declined more than forecast in November. The yen gained against New Zealand's dollar, Brazil's real and the U.K.'s pound as a decline in U.S. stocks prompted investors to exit trades funded by loans made in Japan.

``There is going to be further normalization of risk,'' said David Mozina, senior currency strategist in New York at Lehman Brothers Holdings Inc. ``It doesn't give you a lot of confidence in maintaining a long-dollar stance. So we're very much for selling the U.S. dollar and buying the Japanese yen.'' A long position is a bet on a currency's gain.

The dollar traded at 108.89 against the yen at 7 a.m. in Tokyo. Against the euro, the dollar traded at $1.4707. The euro bought 160.14 yen.

The Fed lowered its overnight lending rate between banks last year by 1 percentage point to 4.25 percent to prevent a housing recession from weighing on growth.

The National Association of Realtors' index of pending home sales decreased 2.6 percent in November, following a revised 3.7 percent gain in October that was larger than previously estimated, the group said yesterday in Washington. The median forecast of economists surveyed by Bloomberg News was for a decline of 0.7 percent.

`Substantially Weaker'

Philadelphia Fed President Charles Plosser yesterday said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ``substantially weaker'' than already projected.

The odds of a half-point Fed rate cut on Jan. 30 were 74 percent yesterday, up from zero percent a week ago, according to futures traded on the Chicago Board of Trade. The chances for a quarter-point reduction were 26 percent, down from 92 percent a week ago.

The decline in U.S. house prices may worsen this year and heighten the risk of a ``more significant downturn'' in the economy, said Boston Fed President Eric Rosengren yesterday.

`Alarm Bell'

``The alarm bell is ringing a little bit louder,'' said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto. Fed officials ``acknowledged increasing risks to growth. I won't be surprised to see euro-dollar reach $1.50 in the next few weeks.''

The Standard & Poor's 500 Index fell 1.8 percent yesterday and touched the lowest since March 16, discouraging investors to put on so-called carry trades financed by Japanese yen.

``With market volatility still elevated, we tend to think that core carry trades will struggle to attract support,'' said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

One-month implied volatility for the yen versus the dollar traded at 12.35 percent yesterday, compared with 11.5 percent a week earlier. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options.

A rise in volatility discourages carry trades, whereby investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rates. The risk is that currency moves erase those profits.

Japan's benchmark interest rate is 0.5 percent, the lowest among developed nations. New Zealand's rate is 8.25 percent, while Brazil's is 11.25 percent.

UBS AG, the world's second-largest currency trader, yesterday lowered its one-month dollar forecast against the euro for the second time since November on speculation U.S. interest rates will be cut by as much as half a percentage point.

The dollar will reach $1.47 in a month, down from the previous forecast of $1.40, UBS strategists wrote in a client note. UBS previously changed its forecast on Nov. 1, predicting the U.S. currency would trade below $1.45 per euro that month. The dollar fell to a record low of $1.4967 on Nov. 23.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.netBo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: January 8, 2008 17:01 EST