March 4 (Bloomberg) -- The dollar traded close to the weakest ever against the euro on speculation the slumping U.S. economy will cause banks to report more losses from the collapse of the subprime-mortgage market.

The U.S. currency fell below 103 yen for the first time since 2005, and touched the weakest level since the euro's 1999 debut. The dollar pared some of its losses versus the euro after European finance officials including Luxembourg Prime and Finance Minister Jean-Claude Juncker stepped up their rhetoric on the euro.

``The dollar weakness will persist,'' said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. ``The dominant theme is heightened risk.''

The dollar touched as weak as $1.5275 per euro, from $1.5179 on Feb. 29, before trading at $1.5203 at 7:03 a.m. in Tokyo. The dollar fell to 102.62 yen, the lowest since Jan. 28, 2005, before trading at 103.50 yen.

Brazil's real gained the most among the 16 most-active currencies yesterday, by 1.3 percent to 1.672 per dollar, after billionaire investor Warren Buffett said in a letter to Berkshire Hathaway Inc. shareholders on Feb. 29 that the real was the only ``direct'' currency investment he made last year.

The dollar dropped to a record low of 1.0309 Swiss francs, before recovering to 1.0424 francs. Dollar losses yesterday came as the Institute for Supply Management said its manufacturing index declined to 48.3 in February from 50.7 in January, indicating a contraction.

`Sell the Dollar'

``The sentiment is to sell the dollar against the yen and the euro,'' said Hidetoshi Yanagihara, a senior currency trader at Mizuho Corporate Bank in New York.

Traders yesterday raised bets the Federal Reserve will cut interest rates by 0.75 percentage point at its March 18 meeting. Futures on the Chicago Board of Trade show traders see a 74 percent likelihood the Fed will lower the main rate to 2.25 percent from 3 percent. A week ago, traders saw no chance of such a deep cut this month. The balance of bets is on a half- point cut.

The euro gained 15 percent against the dollar in the past year, eroding the competitiveness of European exports. A stronger euro also helps the ECB fight inflation, which remained last month at the highest level since 1999.

``I consider very important what has been affirmed and reaffirmed by the U.S. authorities, including the secretary of the Treasury and the president of the United States of America, according to whom a strong dollar policy is in the interests of the United States,'' European Central Bank President Jean-Claude Trichet told reporters in Brussels yesterday.

Juncker's Concern

President George W. Bush last week said ``we're still for a strong dollar.'' Treasury Secretary Henry Paulson, in an interview yesterday on Bloomberg Television after a speech in Arlington, Virginia, said: ``You know how strongly I believe that a strong dollar is in our nation's interest.''

Juncker, speaking at a press conference after a meeting of euro-area finance ministers in Brussels, said ``we are concerned by exchange rates moves,''

The U.S. currency tumbled 2.3 percent against the euro in February, the most since September. The synthetic euro, which estimates the European currency's value before 1999, yesterday rose to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

``The comments may reflect a growing recognition that the strong euro is starting to catch the eye of the ECB,'' said Win Thin, a currency strategist with Brown Brothers Harriman & Co. in New York.

Yen Gains

U.S. policy makers have lowered the target rate by 2.25 percentage points since September, while the ECB has kept its benchmark at a six-year high of 4 percent.

The yield advantage of two-year German bunds over comparable-maturity Treasuries reached 1.57 percentage points, the highest since 1993, making European debt more attractive.

The yen gained as credit-market losses prompted investors to reduce holdings of higher-yielding assets financed with loans from Japan, a strategy dubbed the carry trade. The yen advanced 1 percent against the South Korean won.

Since the start of 2007, more than 45 of the world's biggest banks and securities firms have taken about $181 billion in asset writedowns and credit losses, including reserves set aside for bad loans.

Options Bets

Japan's benchmark rate of 0.5 percent, the lowest among industrialized nations, compares with 11 percent in South Africa. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

Options traders are paying the biggest premium in five weeks to bet on a stronger yen. The one-month risk reversal rate for dollar-yen options yesterday was minus 3.35 percent from minus 2.95 percent at the end of last week, reaching the most in favor of yen calls relative to puts since Jan. 24. A negative rate indicates greater demand for yen call options that grant the right to buy, over put options giving the right to sell.

``The rapid move lower in the dollar against the yen in particular is fueling speculation of a break in the key 100 level for the first time since 1995,'' Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients. ``It is notable that rhetoric from Japanese officials has been non-existent.''

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

Last Updated: March 3, 2008 17:15 EST