April 29 (Bloomberg) -- The dollar strengthened to a three- week high against the euro on speculation the Federal Reserve will signal that it's done lowering interest rates.

The currency is headed for its first monthly advance against the euro this year, and also gained versus the Norwegian krone and pound today, as interest-rate futures show the Fed may reduce borrowing costs tomorrow and then pause. The pound was poised for its biggest monthly drop against the dollar in 2008 as mortgage approvals in the U.K. plunged last month.

``If the Fed is not at the end of the easing cycle, it's near the end,'' said Jeff Gladstein, global head of currency trading at AIG Financial Products in Wilton, Connecticut. ``I don't think the dollar will strengthen aggressively by any stretch, but I do think it's trying to bottom.''

The dollar rose 0.6 percent to $1.5563 per euro at 4:25 p.m. in New York, from $1.5657 yesterday. It touched $1.5541, the strongest level since April 3. The yen increased 0.1 percent to 104.04 against the dollar, from 104.19 yesterday. It advanced 0.7 percent to 161.93 versus the euro, after touching 161.12, the strongest since April 16.

The U.S. currency has risen 4.3 percent against the yen and 1.4 percent versus the euro this month. The dollar fell to $1.6019 against the euro on April 22, the lowest level since the European currency debuted in 1999. The euro is up 2.7 percent versus the yen in April.

Futures on the Chicago Board of Trade show an 82 percent chance the Fed will cut the target rate for overnight lending by a quarter-percentage point to 2 percent tomorrow and odds of 71 percent that the rate will be held at that level in June.

New Zealand Dollar

New Zealand's dollar weakened against most of the major currencies after a government report showed the annual trade deficit unexpectedly widened in March. The kiwi declined 1.4 percent to 77.49 U.S. cents after touching 77.27, the lowest level since Jan. 28.

The yen rose against all of the major currencies on speculation investors reduced carry trades in which they get funds in a country with low borrowing costs and purchase assets where returns are higher.

Higher-yielding assets were less attractive before the Fed's decision on interest rates tomorrow and the release of economic reports on gross domestic product and payrolls later this week, according to Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

``There is perhaps still a little more value in the safe havens,'' said Osborne. ``The markets are perhaps worried about equities fading again in May if we get weak GDP and payrolls.''

Yen's Advance

Japan's currency increased 1.5 percent to 80.71 versus the New Zealand dollar and 1.2 percent to 61.01 against Brazil's real. Japan's target lending rate of 0.5 percent compares with 11.75 percent in Brazil and 8.25 percent in New Zealand.

The British pound dropped 1 percent to $1.9694 and was down 0.8 percent for the month as the Bank of England reported that mortgage approvals in the U.K. fell in March to the lowest level in at least nine years.

Australia's dollar dropped 0.5 percent to 93.46 U.S. cents after the New York-based Conference Board's Australian index of leading economic indicators fell in February for a third month.

The euro was under pressure as the Bloomberg purchasing managers index showed today that European retail sales dropped the most in more than four years in April. Another report showed French consumer confidence dropped this month to a record low as accelerating inflation squeezed incomes.

Slowdown `Spreading'

``The slowdown in the U.S. is spreading to other countries,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The dollar, which has been on its knees, is in a short-term bottoming process.''

Investors should sell the euro against the dollar over the next several weeks because two-year German bunds have lost some of their yield advantage over comparable-maturity Treasuries, said Citigroup Inc., one of the 10 biggest currency traders. The yield difference, or spread, between the two securities has decreased to 1.46 percentage points, from 1.85 on March 31, which was the most since the euro was launched.

European Central Bank policy makers have held the main refinancing rate at a six-year high of 4 percent since June to contain inflation. The U.S. central bank has cut its fed funds target 3 percentage points to 2.25 percent since September.

``The weak economic data looks increasingly out of the step with the ECB's hawkish stance,'' said Todd Elmer, currency strategist at Citigroup Global Markets Inc. in New York. ``It's a more benign environment for the U.S. dollar.''

The Conference Board's index of U.S. consumer confidence dropped to 62.3 this month, the lowest level since March 2003, from a revised 65.9 in March, the New-York-based research group reported today.

The Fed will ``keep the door open for further easing,'' wrote Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, in a research note today.

To contact the reporter on this story: Ye Xie in New York at Yxie6@bloomberg.net

Last Updated: April 29, 2008 16:26 EDT