May 26 (Bloomberg) -- The euro fell against the dollar on speculation last week’s gain by the most since March was too large to sustain, reducing its appeal.

The 16-nation currency depreciated for the first time in seven days, eroding gains that pushed it last week to the highest level in four months. The dollar and yen pared gains versus the euro as U.S. consumer confidence rose to the highest level since September, cutting demand for safety.

“Euro bulls are running out of buying power,” said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York. A close below $1.3880 today will signal further declines in the common currency, he said.

The euro dropped 0.2 percent to $1.3986 at 3:20 p.m. in New York, from $1.4017 yesterday. It touched $1.4051 on May 22, the highest level since Jan. 2. The 16-nation euro traded at 132.82 yen, compared with 132.92. The dollar increased 0.1 percent to 94.96 yen from 94.83.

The 14-day Relative Strength Index on the euro-dollar exchange rate reached 71.12 yesterday, the highest level since March 23. A reading above 70 typically signals a trend of increasing prices may end. The euro’s decline today helped push the index down to 69.

South Korea’s won lost 1.1 percent to 1,262.88 against the dollar on concern North Korea will conduct more nuclear tests after the Communist state said yesterday it successfully carried out an underground explosion.

Norway’s Krone

Norway’s krone declined against most of the other major currencies after the central bank said in a statement the country’s financial institutions need to keep building up capital to ride out the global financial crisis.

The krone slid as much as 1.4 percent to 9.0015 per euro, its weakest level since March 31, and weakened as much as 2.2 percent to 6.4809 against the dollar.

South Africa’s rand weakened 0.4 percent to 8.2716 against the dollar and lost 0.6 percent to 13.1753 versus the pound as Africa’s biggest economy contracted in the first quarter more than economists forecast, deepening the nation’s first recession in 17 years.

The euro also slid versus the dollar as the Daily Telegraph quoted Jochen Sanio, president of the German regulator BaFin, as saying debt levels of banks will blow up “like a grenade” unless they participate in the government’s bad-bank plan.

“The report over the German debt situation isn’t helping sentiment toward the euro,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. The comments sound “fairly dire,” he said.

German Banks

German banks have 200 billion euros ($280 billion) of bad debt, Sanio said last week, according to the Telegraph. Write- offs may reach 816 billion euros, the newspaper reported, citing an internal memo from the regulator’s office. In an interview with Bloomberg News last week, Sanio said Germany is “more than able” to cope with the 200 billion euros of toxic assets that its banks still hold.

The Dollar Index, used by Intercontinental Exchange Inc. to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, increased 0.1 percent to 80.116, paring an advance that earlier pushed the trade-weighted measure as high as 80.780.

“We’ve seen such a huge turnaround relative to expectations in the data,” said Lauren Rosborough, a currency strategist at Westpac Banking Corp. in London. “That may well have stalled the move in the Dollar Index for the rest of today.”

U.S. Sentiment

The Conference Board’s index of U.S. consumer sentiment surged in May to 54.9, higher than forecast and the biggest gain since April 2003, the New York-based research group said today. Manufacturing activity in the central Atlantic region unexpectedly rose this month for the first time in more than a year, a report from the Richmond Federal Reserve Bank showed.

The dollar posted its biggest weekly decline against the euro in two months last week on speculation a deterioration of U.S. creditworthiness will make assets such as Treasuries less attractive to investors.

Australia’s dollar rose 0.4 percent to 78.50 U.S. cents as a gain in U.S. stocks spurred speculation demand for the South Pacific nation’s higher-yielding assets will increase. The Aussie extended its advance from a five-year low of 60.09 cents reached in October to 31 percent.

Outlook for Aussie

Analysts are raising forecasts for the Australian dollar faster than any other major currency on optimism for a global economic recovery.

The median year-end Aussie forecast in monthly Bloomberg surveys rose 14 percent this year, the biggest increase among major currencies against the dollar, and is now 3 cents shy of the current price, half the gap in January. Strategists at BNP Paribas SA, Wells Fargo & Co. and 21 other companies raised estimates in May on speculation China’s demand for Australian exports, from iron ore to wool, will rebound.

“The bears are throwing in the towel, and the Aussie is undervalued,” said Paresh Upadhyaya, who helps manage $21 billion in currency as a Putnam Investments senior vice president in Boston.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

Last Updated: May 26, 2009 15:25 EDT