March 31 (Bloomberg) -- The dollar posted its biggest quarterly loss against the euro in almost four years as the Federal Reserve cut its target lending rate by the most since 1984 to revive the economy while the European Central Bank held borrowing costs at a six-year high to contain inflation.

The currency traded within a cent of a record low against the euro after a European Union report showed consumer prices accelerated at the fastest pace in almost 16 years this month. The pound fell to an all-time low against the euro, posting its largest-ever quarterly decline, as U.K. housing prices dropped in March for a sixth month.

``Heading into this quarter, a lot of people thought the worst for the dollar was behind us,'' said Daniel Katzive, a currency strategist at Credit Suisse Group in New York. ``It's pretty clear that this view has been damaged.''

The dollar traded at $1.5783 per euro at 4:14 p.m. in New York, compared with $1.5796 on March 28. The yen declined 0.5 percent to 99.74 per dollar, from 99.23 at the end of last week. It dropped 0.4 percent to 157.42 versus the euro, compared with 156.79 on March 28.

The U.S. currency lost 8.2 percent against the euro this quarter, the most since December 2004. Today it touched $1.5896, short of the all-time low of $1.5903 reached March 17.

The pound reached an all-time low of 79.73 pence against the euro today after research company Hometrack Ltd. said the average price of a home in England and Wales declined 0.2 percent this month. Sterling is down 8.2 percent against the euro this quarter, the biggest drop ever.

Iceland's Krone

Iceland's krone climbed against all 178 currencies monitored by Bloomberg News today after Prime Minister Geir Haarde said on March 28 that the government and central bank will assist banks ``if a serious situation were to emerge.'' The krone climbed as much as 3.5 percent versus the euro.

The Swiss franc and yen advanced the most against the dollar this quarter among the 16 most active currencies as global credit market losses encouraged investors to reduce the purchase of high-yielding currencies funded by cheap loans in Switzerland and Japan. The countries' target lending rates are 2.75 percent and 0.5 percent, respectively.

The Swiss franc rose 14 percent, the biggest advance since March 1995. The yen's 12 percent gain against the dollar this quarter is the biggest since September 1999.

In the worst quarterly performance against the U.S. dollar among major currencies, South Africa's rand fell 16 percent, the biggest drop since 2001. The government has cut its growth forecast for this year to 4 percent from 4.5 percent as nationwide power shortages crimp mining output.

Dollar Index

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, has lost 6.6 percent this year, dropping to a record of 70.698 on March 17. It fell to 71.39 today, from 71.68 on March 28.

The ECB has kept its main refinancing rate at a six-year high of 4 percent since June. Consumer prices in the 15 nations that use the euro rose 3.5 percent in March, the most since June 1992, the EU's statistics office in Luxembourg said. Economists surveyed by Bloomberg News had expected 3.3 percent.

ECB council member and Bank of Finland governor Erkki Liikanen said today in a statement that while the European growth outlook has become ``more subdued,'' inflation has accelerated.

`Hawkish' ECB

``Until the ECB starts changing its hawkish tone, you are going to see relentless sellers of dollars and buyers of the euro anywhere between here and $1.55,'' said Firas Askari, head of foreign-exchange trading at BMO Capital Markets in Toronto.

The Fed slashed its target lending rate 2 percentage points this quarter to 2.25 percent, the deepest cut since December 1984, to prevent the housing slump and credit market losses from plunging the U.S. economy into a recession.

U.S. payrolls probably fell by 50,000 in March, shrinking a third consecutive month, according to the median forecast of 72 economists surveyed by Bloomberg News. The report from the Labor Department is scheduled to be released April 4.

``The market focus has shifted from whether we'll fall into a recession to how long this recession will last,'' said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina.

Arab Gulf nations may keep their pegs against the U.S. currency even as a dollar trading near a record low against the euro fuels inflation in their countries. Ending their fixed- exchange-rate regime may spark a new dollar crisis, according to Simon Williams, the chief Gulf economist at HSBC Holdings Plc in Dubai, a move that would slash the value of their $500 billion of assets denominated in the currency.

Gulf central bank governors will hold the first of two meetings this year in Doha, Qatar, on April 6-7 to discuss monetary and currency policy.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net.

Last Updated: March 31, 2008 16:18 EDT