May 21 (Bloomberg) -- The dollar’s drop is broadening amid the thaw in credit markets and investor concern about the effects of the Federal Reserve’s asset-buying program, according to Royal Bank of Scotland Group Plc.

“The decline in the dollar has developed more a life of its own this week, extending to major currencies even as U.S. equities have flattened out,” Greg Gibbs, a foreign-exchange strategist at RBS in Sydney, wrote in a research note today. “The broader thematic is that simply the U.S. was and is pursuing a relatively easy monetary policy that tends to create inflation pressure.”

The dollar lost 9.7 percent against the euro since reaching its highest level this year on March 3. It weakened 6 percent versus the yen since peaking on April 6. The Standard & Poor’s 500 Index rallied 36 percent from March 6 through May 8, since when it declined 2.8 percent.

Credit markets are showing signs of thawing after the Fed committed $12.8 trillion to drag the U.S. economy out of its longest recession since the 1930s. The London interbank offered rate, or Libor, for three-month dollar loans more than halved this year, falling today by the most since March 19. At the same time, the Fed is buying government bonds to further reduce borrowing costs after cutting interest rates to a record low.

Investors should put on short dollar positions against a combination of a “risky currency” such as Brazil’s real and a “safe” currency such as the yen, Gibbs said. A short position is a bet that an asset or currency will decline.

“The Canadian dollar might be the best middle ground currency to buy against the U.S. dollar,” he added.

The dollar strengthened to $1.3757 per euro as of 10:39 p.m. in New York from $1.3780 yesterday. It dropped to 94.57 yen, from 94.88 yen.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

Last Updated: May 21, 2009 10:53 EDT