July 15 (Bloomberg) -- The dollar weakened the most against the yen since the March collapse of Bear Stearns Cos. after Federal Reserve Chairman Ben S. Bernanke said growth and inflation risks have both increased.

The currency touched a record low against the euro as Bernanke said helping financial markets return to more normal functioning remains ``a top priority.'' The dollar erased its drop versus the euro as the price of crude oil fell as much as $9.26 a barrel. German investor and analyst confidence declined to the lowest level since data began in 1991.

``The Fed is downgrading some of their economic outlook for the medium term,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``That translates to a continued postponement of any thoughts of rate hikes,'' putting pressure on the dollar.

Against Japan's currency, the dollar fell 1.3 percent to 104.75 yen at 4:19 p.m. in New York, from 106.14 yesterday. It touched 104.16, the lowest level since June 3. The yen increased 1.4 percent to 166.58 per euro, from 168.89 yesterday, when it weakened to the all-time low of 169.75. The euro traded at $1.5903, compared with $1.5908 yesterday, after touching $1.6038, the highest since the 15-nation currency's 1999 debut.

The dollar has given up most of the gains made versus the euro since July 3, when European Central Bank President Jean- Claude Trichet said he had ``no bias'' on future interest-rate moves. The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since slumped 1.1 percent on concern losses at Fannie Mae and Freddie Mac will deepen.

Fed Rate Outlook

Federal funds futures on the Chicago Board of Trade show a 3 percent chance that the Fed will increase the 2 percent target lending rate at its Aug. 5 meeting, compared with 12 percent odds yesterday and 77 percent a month ago.

The Swiss franc appreciated to within a half-cent of parity with the U.S. dollar while the Japanese yen strengthened on speculation financial firms' losses will encourage investors to sell higher-yielding assets and pay back loans in Switzerland and Japan. Against the dollar, the franc rose as much as 1.5 percent to 1.0012.

The yen remained higher against the euro after the Bank of Japan kept its target lending rate at 0.5 percent, the lowest among major economies. In the carry trade, investors get funds in countries with low borrowing costs and buy assets where returns are higher. The Swiss benchmark is 2.75 percent.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a fifth day on the ICE market, dropping as much as 0.8 percent to 71.314, the lowest level since April 23, from 71.915.

Pound at $2

The pound surpassed $2 for the first time since July 1 on speculation accelerating inflation will keep the Bank of England from lowering interest rates to avert a recession. Sterling advanced 0.5 percent to $2.0042, from $1.9951.

Against Australia's currency, the dollar weakened as much as 1.4 percent to 98.50 cents, the lowest level since 1983, from 97.18 cents yesterday.

In testimony before the Senate Banking Committee today, Bernanke abandoned his June assessment that the threat of an economic downturn has diminished, telling lawmakers that growth and inflation risks are increasing.

Treasury Secretary Henry Paulson told the panel that the government would buy shares in Fannie and Freddie ``only if necessary'' and called on Congress to approve his plan to shore up confidence in them. Global banks and securities firms have reported losses and writedowns of more than $400 billion related to subprime mortgages.

Bush on Housing

President George W. Bush said in a White House news conference today that the administration's efforts to bolster the U.S. mortgage markets are intended as a ``temporary'' measure to stabilize the troubled housing industry.

The dollar erased its drop against the euro after the price of crude oil fell as much as 6.4 percent to $135.92 a barrel, lowering the inflationary pressure on the economy.

``We've reached an extreme point of bearishness,'' said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Maybe we're very close to the bottom here.''

Traders should sell the euro against the dollar as record energy prices, ECB tightening and slowing global growth wear on the euro zone, according to a research note today from Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. He expects the euro to fall to $1.4365, where it traded Jan. 22.

U.S. Retail

U.S. retail sales advanced 0.1 percent last month, after a revised 0.8 percent increase in May, the Commerce Department reported today in Washington.

The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations fell to minus 63.9 in July from minus 52.4 the previous month. Economists expected a decline to minus 55, according to the median forecast of 37 analysts surveyed by Bloomberg News.

``As the U.S. data continues to come out soft, that will create an underlying source of weakness for the dollar, but the European data looks softer as well,'' said Jens Nordvig, a strategist at Goldman Sachs Group Inc. in New York. `` That makes it a lot harder to say U.S. economic weakness is positive for the euro.''

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

Last Updated: July 15, 2008 16:21 EDT