March 19 (Bloomberg) -- The dollar declined against the yen and Swiss franc on speculation the Federal Reserve's six interest-rate cuts since September won't be enough to stem credit-market losses and revive the economy.

The U.S. currency fell starting in Asian trading on speculation some European and U.K. banks were facing funding difficulties. The yen and franc also rose against major currencies on speculation investors were exiting carry-trade purchases of commodities that were financed with cheap loans from Japan and Switzerland.

``The downside risk for the dollar still exists,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The Fed's bigger worry right now is a total breakdown of the financial market.''

The dollar declined to 99.30 yen at 2:52 p.m. in New York, from 99.85 yesterday, when it surged 2.7 percent, the most since January 1999. The yen advanced to 154.87 per euro, from 155.95. The dollar traded at $1.5598 per euro, from $1.5625.

Gold plunged the most since June 2006, leading losses in commodities. South Africa's rand fell the most against the yen and franc, losing about 2.5 percent. Canada's dollar sank 1.6 percent versus the U.S. dollar, the most this year.

The U.S. dollar dropped to 1.0006 Swiss franc from 1.0024. The franc, often favored in times of crisis, has advanced 14 percent this year.

All `About Leverage'

``It's so much about leverage,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. Traders ``shorted the yen and franc to buy commodities.'' A short position is a bet a currency will decline.

Japan's benchmark rate is 0.5 percent and Switzerland's is 2.75 percent. Traders have borrowed at those rates to buy assets from gold to the Brazilian real, which gained 21 percent in the past year as the country's 11.25 percent benchmark rate lured buyers. Gold was up 20 percent this year before today.

The Standard & Poor's 500 index fell 1.6 percent, crimping demand for carry trades. It gained as much as 0.8 percent earlier and the dollar pared losses versus the euro after Morgan Stanley said net income fell 42 percent in the first quarter to $1.45 a share, beating the average estimate of $1.01 a share in a Bloomberg survey. The dollar also got support as regulators for Fannie Mae and Freddie Mac eased capital requirements to allow them to buy more loans.

The dollar began its decline versus the yen earlier on speculation some European and U.K. banks, including HBOS Plc, Britain's biggest mortgage lender, will report more writedowns related to subprime-mortgage investments.

`Relief Rally'

``Yesterday there was a relief rally in the dollar; this morning everyone wakes up and there is talk of problems with HBOS,'' said John Hardy, a London-based market strategist at Saxo Bank A/S, a Copenhagen-based bank specializing in currencies, stocks, bonds and derivatives. ``Risk aversion is back all of a sudden.''

HBOS said it has ``ready access'' to funding after the company plummeted in London trading. U.K. regulators are investigating whether traders have been seeking to profit by spreading ``unfounded rumors'' about financial stocks.

Adding to concern for the outlook at financial firms, JWM Partners LLC, the investment firm run by ex-Long-Term Capital Management LP chief John Meriwether, lost 24 percent in its $1 billion fixed-income hedge fund this year through March 14, according to two people with knowledge of the matter.

`Dollar Will Recover'

The Fed has cut rates 2 percentage point this year to restore confidence to financial markets and avert a recession. Banks are reeling from $195 billion in assets writedowns and credit losses since the beginning of 2007, according to Bloomberg data.

``The dollar will recover'' as soon as housing shows signs of bottoming out, Jim O'Neill, head of global economic research at Goldman Sachs, the most profitable securities company, said in a Bloomberg Television interview today.

Goldman recommends investors sell the euro versus the dollar because ``it has come a long way,'' O'Neill said.

The Icelandic krona slumped to a record low against the euro. It fell as much as 6.2 percent to 127.985, the lowest level since the euro's 1999 debut.

South Korea's won climbed 0.5 percent to 1,009.10 per dollar as of the 3 p.m. close in Seoul, compared with 1,014 yesterday, according to Seoul Money Brokerage Services Ltd.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net

Last Updated: March 19, 2008 14:57 EDT