June 20 (Bloomberg) -- The dollar fell, poised for its biggest weekly decline against the euro in almost three months, on speculation the Federal Reserve will delay raising interest rates to support the U.S. economy.

The currency is also poised to drop this week versus the yen after a contraction in regional manufacturing prompted traders to pare bets for a rate increase on June 25. The euro was set for a sixth weekly advance against the yen, its longest in more than a year, on speculation European Central Bank President Jean-Claude Trichet will signal in a speech today that policy makers may raise borrowing costs next month.

``The dollar's decline comes as hawkish sentiment wanes,'' said Paul Robinson, a London-based foreign-exchange strategist at Barclays Capital and a former Bank of England economist. ``We don't actually expect the Federal Reserve to raise rates for the next few months.''

The dollar fell 0.7 percent to $1.5611 per euro at 7:02 a.m. in New York, from $1.5504 yesterday, leaving it 1.5 percent lower than last week. The U.S. currency slipped 0.4 percent to 107.54 yen. The euro rose 0.3 percent to 167.90 yen, poised for a 0.9 percent gain this week.

The dollar may decline to $1.59 per euro by September, Robinson predicted. The U.S. currency slid 2.4 percent versus the euro in the week ended March 28.

The Australian and New Zealand dollars headed for weekly gains on speculation the countries will maintain their rate advantage over the U.S. The Aussie, as Australia's currency is known, rose 1.7 percent this week to 95.47 U.S. cents, its biggest gain since March 28. The New Zealand dollar jumped 1.9 percent to 76.37 U.S. cents, its largest increase in more than three months. Benchmark rates are 7.25 percent in Australia, 8.25 percent in New Zealand and 2 percent in the U.S.

Weekly Drop

The Swiss franc headed for a second weekly decline against the euro after the Swiss National Bank signaled inflation is under control following its decision yesterday to keep borrowing costs at 2.75 percent. It was last quoted at 1.6169 per euro from 1.6101 at the end of last week.

The U.S. currency touched a one-month high of $1.5303 per euro last week after Fed Chairman Ben S. Bernanke said on June 9 that economic risk has faded, raising speculation the central bank will increase rates this year to slow inflation.

Money managers are paring their dollar holdings at the fastest pace since March, State Street Corp., the second-largest money manager for institutions, said yesterday.

`Giving Up'

``We don't believe the Fed can fulfill market interest-rate expectations,'' said Michael Metcalfe, the London-based head of macro strategy at State Street Global Markets. ``Investors are giving up their dollar long positions.''

Futures on the Chicago Board of Trade showed a 12 percent chance the Fed will increase the target rate for overnight lending between banks by a quarter-percentage point on June 25, compared with 22 percent odds a week ago.

The dollar also fell after Moody's Investors Service stripped MBIA Inc. and Ambac Financial Corp. of their top investment-grade rankings yesterday, raising concern about further writedowns.

``The catalyst for dollar losses was Moody's announcement late yesterday,'' Adam Cole, the London-based head of global currency strategy at Royal Bank of Canada, wrote in a note to clients.

The Philadelphia Fed reported yesterday that its general economic index, a gauge of manufacturing, dropped to minus 17.1 in June, from minus 15.6 the previous month. Data this week also showed U.S. housing starts fell in May to a 17-year low and industrial production unexpectedly declined.

Oil Gains

Crude oil for July delivery climbed as much as $1.85, or 1.4 percent, to $133.78 a barrel today. The price reached a record $139.89 on June 16. The correlation of the dollar versus the euro and oil prices is minus 0.93 for the past year, indicating they move in the opposite direction 93 percent of the time, according to Bloomberg calculations based on value changes.

German producer-price inflation, an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs.

Prices for goods from newsprint to plastics increased 6 percent from a year earlier, the most since July 2006, the Federal Statistics Office in Wiesbaden said today. Economists expected a 5.8 percent gain, the median of 27 estimates in a Bloomberg News survey showed. Prices rose 1 percent from April.

Central banks have no option but to raise rates if higher productivity will not help offset commodity price-induced inflation pressures, ECB executive board member Lorenzo Bini Smaghi said in a column in the Financial Times yesterday.

Action Needed

``Experience has shown that if inflation is left to creep up, the cost of bringing it down later will be even higher. The central bank must ultimately act if this is what is needed to maintain price stability,'' the policy maker wrote.

The ECB's Trichet speaks in Namur, Belgium, at 6:45 p.m. local time. ECB policy maker Juergen Stark is also scheduled to give a speech at 7:30 p.m. in Bad Homburg, Germany, today.

Trichet said on June 5 that the bank may increase its 4 percent benchmark rate by a quarter-percentage point next month. Luxembourg Prime Minister Jean-Claude Juncker said before a European Union summit in Brussels yesterday that inflation in the region is ``too high.''

``Monetary policy expectations will prevent any rapid declines in the euro versus the dollar and the yen,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``A July rate hike is a done deal.''

Rate Bets

Futures contracts indicate traders are betting the ECB will lift its rates this year. The yield on the three-month euribor futures contract for September delivery was 5.15 percent, up from 4.9 percent at the start of this month. The contracts settle to the three-month inter-bank offered rate for the euro, which averaged 18 basis points more than the ECB's benchmark from 1999 until August.

The dollar is ``overbought'' against the yen on charts used to predict price movements, and may fall to 105.61, said George Davis, chief technical analyst in Toronto at RBC Capital Markets, a unit of Canada's biggest bank.

The level is derived from an ascending trend line that began on March 17, according to RBC. The line connects lows of 95.76 yen on March 17, 102.74 yen on May 22, 103.88 yen on June 3 and 104.43 yen on June 9, based on data compiled by Bloomberg. Support is a level where buy orders may be clustered.

The dollar's 14-day stochastic oscillator chart versus the yen was 85.39 today, according to Bloomberg data. A level above 80 suggests the currency has risen too fast.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: June 20, 2008 07:52 EDT