May 8 (Bloomberg) -- The euro may extend its decline against the dollar before a meeting today at which traders expect the European Central Bank will keep rates unchanged while signaling concern that economic growth is slowing.

The 15-nation currency fell versus the dollar yesterday as the yield advantage of German bunds over Treasuries decreased to the narrowest in more than two months. The pound fell to a 2 1/2-month low against the dollar before today's meeting of the Bank of England after an industry report said yesterday that British consumer confidence declined last month.

``The market is building up expectations that the ECB will adopt a less hawkish tone,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``We are in a phase of deep correction to $1.48.''

The euro traded at $1.5388 at 6:02 a.m. in Tokyo, after decreasing 0.9 percent yesterday. It has dropped 3.7 percent versus the dollar since April 22, when the dollar sank to a record low of $1.6019 per euro. The dollar was little changed at 104.69 yen. The euro traded at 161.13 yen, after dropping 0.9 percent yesterday.

The ECB and the Bank of England are forecast to maintain their lending targets at 4 percent and 5 percent, respectively, at meetings today, according to Bloomberg News surveys.

The euro's losses yesterday were tempered by a surge in the price of crude oil, which rose above $123 a barrel in New York for the first time. Investors have moved to oil as a hedge against the dollar, which has dropped 5.2 percent versus the euro this year. The euro versus the dollar has had a correlation of 0.96 with the price of crude in the past 12 months. A reading of 1 would mean they move in lockstep.

Weaker Pound

The British pound dropped 0.3 percent versus the Canadian dollar yesterday after Nationwide Building Society said an index of sentiment in the U.K. declined to the lowest level since data began in May 2004. The pound traded at $1.9537 after touching $1.9503 yesterday, the weakest level since Feb. 21.

The euro weakened versus the dollar yesterday as the European Union reported that retail sales in the countries that share the single currency declined 1.6 percent in March from a year earlier, the biggest drop since the data began in 1995. The euro extended losses after a German government report showed factory orders dropped 5 percent in the year ended in March, compared with an 8.9 percent increase in the prior month.

``The European economy in particular will be slowing down, and global contagion will be taking hold,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, in an interview on Bloomberg Television. ``This is playing in favor of the dollar in the short term.''

Bond Spread

The spread between two-year German bunds and comparable- maturity U.S. Treasuries reached 1.36 percentage points yesterday, the narrowest since late February, making dollar- denominated assets more attractive to investors.

The dollar's climb versus the euro has gained momentum since the Federal Reserve said rate reductions to date were ``substantial'' after lowering its target lending rate on April 30 by a quarter-percentage point to 2 percent, its seventh cut since September.

Kansas City Fed President Thomas Hoenig said on May 6 in a speech in Denver that ``serious'' U.S. inflation pressure may compel the central bank to increase interest rates.

``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' said Hoenig, a nonvoting Fed official this year.

U.S. Productivity

U.S. productivity rose at a 2.2 percent annual rate in the first quarter after a 1.8 percent gain in the prior quarter, the Labor Department said yesterday in Washington. The median forecast of 69 economists surveyed by Bloomberg News was for the measure of worker efficiency to advance at a 1.5 percent pace.

Futures on the Chicago Board of Trade show an 86 percent chance that the Fed will hold borrowing costs steady at its June 25 meeting. The balance of bets is for a reduction of a quarter- percentage point.

The Dollar Index traded on ICE futures in New York, which tracks the dollar against currencies of six trading partners, rose yesterday to 73.514, from 72.999 on May 5.

``We are looking for the dollar to stabilize and then to moderately appreciate,'' said Laurence Meyer, a former Fed governor who's now vice chairman of St. Louis-based Macroeconomic Advisers LLC., in an interview on Bloomberg Television. ``It looks like the Fed is set for a pause.''

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

Last Updated: May 7, 2008 17:13 EDT