Feb. 26 (Bloomberg) -- The euro rose to a three-week high against the dollar after a private report showed German business confidence unexpectedly strengthened for a second month.

The euro rose versus 10 of the 16 most-actively traded currencies as traders pared bets the European Central Bank will lower interest rates this year. The dollar fell against the common currency and Japanese yen before a report economists said may show U.S. consumer confidence dropped to a four-year low as the labor market weakens.

``U.S. consumer confidence numbers are one-by-one flipping into recessionary territory while we remain above historical averages in the euro zone,'' said Adam Cole, the London-based head of currency strategy at Royal Bank of Canada, the nation's biggest lender. ``Contagion from the U.S. slowdown has been limited thus far and that's positive for the euro.''

The euro was at $1.4878 by 7:08 a.m. in New York, the highest since Feb. 1, from $1.4830 yesterday. It advanced to a six-week high against the yen at 160.64 from 160.27. The dollar weakened 0.1 percent to 107.97 yen.

The euro will rise above $1.50 in the first quarter before declining as the ECB lowers interest rates to counter a slowdown in the European economy, Cole predicted.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, rose to 104.1 in February, from 103.4 in January. Economists had forecast a drop to 102.9, the median of 45 estimates in a Bloomberg News survey showed.

High Yielders

The yen fell against Sweden's krona and the South African rand as stocks gained after the biggest bond insurers kept their top debt ratings, encouraging investors to seek higher-yielding assets. The yen declined 0.4 percent versus the krona to 17.290 from 17.215 and 0.8 percent to 14.2045 per rand from 14.0949.

The yen also fell against the rand after a government report showed South African economic growth unexpectedly accelerated to an annualized 5.3 percent in the fourth quarter.

The odds of the Frankfurt-based ECB lowering borrowing costs fell, with the implied yield on the Euribor futures contract for June rising 4 basis points to 4.16 percent.

``Markets have this sense that while the euro zone has been hit by the slowdown in the U.S., things are not quite as bad as they seem,'' said Steve Barrow, chief currency strategist in London at Bear Stearns Cos., the fifth-largest U.S. securities firm. ``That's proven positive as far as the euro is concerned.''

The euro earlier fell after government reports showed today the German economy, Europe's largest, is losing momentum. Consumer spending fell for the first time in three quarters in the three months through December and export growth slowed.

German Data

Household spending dropped 0.8 percent from the third quarter, when it increased 0.3 percent. Export growth almost halved to 1.3 percent from 2.5 percent. Gross domestic product rose 0.3 percent, compared with 0.7 percent in the previous three months.

The euro extended gains after an industry report showed U.S. home foreclosures jumped 57 percent in January from a year earlier. RealtyTrac said they rose 17,252 in January to 233,001.

The common currency may rise further before a report that may show U.S. consumer confidence fell to the lowest since October 2003. The Conference Board's index of confidence slipped to 82 from 87.9 in January, according to the median estimate of 63 economists surveyed by Bloomberg News. The report is due at 10 a.m. in New York.

Fed funds futures on the Chicago Board of Trade indicate a 92 percent chance the U.S. central bank will reduce the 3 percent target rate for overnight lending between banks by 50 basis points at their March 18 meeting and 8 percent odds of a quarter- point cut.

Kohn, Bernanke

Fed Vice Chairman Donald Kohn speaks on the economy and monetary policy in North Carolina today. Fed Chairman Ben S. Bernanke will deliver his semi-annual testimony to the House Financial Services Committee tomorrow.

Technical indicators suggest the euro may reach $1.56 against the dollar in a few months, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The so-called resistance level of $1.56 represents a 200 percent reversal of the euro's slide to a low of $1.4311 on Dec. 20, from a record high of $1.4967 on Nov. 23, based on a series of numbers known as the Fibonacci sequence. Resistance is a level where selling is expected to outweigh buying.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: February 26, 2008 07:11 EST