Feb. 29 (Bloomberg) -- The dollar fell to a 2 1/2-year low against the yen on speculation a U.S. government report will show consumer spending stayed at the weakest in six months.

The currency headed for its biggest monthly loss against the euro since September as a cooling economy prompted traders to bet the Federal Reserve will cut interest rates at least twice more this year. The dollar is the second-worst performer this month among 16 major currencies against the euro after Fed Chairman Ben S. Bernanke said the dollar's depreciation is ``a positive factor'' for reducing the U.S. trade deficit.

``This is the Bernanke shock, causing much faster dollar depreciation than expected,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``We are entering into another world of dollar weakness. The Fed is not unhappy about that.''

The U.S. currency declined to 104.67 yen, the weakest since May 2005, before trading at 104.88 yen as of 9:24 a.m. in Tokyo, from 105.37 yen in New York late yesterday. It traded at $1.5188 per euro, from $1.5193 in New York late yesterday, when it touched $1.5229, the weakest since the euro began trading at about $1.17 in January 1999.

The dollar may fall to $1.5230 per euro today, Kato forecast.

Gains in the yen against the dollar accelerated after it broke through 105, where traders have orders to buy, said Gen Kawabe, senior currency manager based in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan's seventh-largest publicly traded bank by assets. Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.

`Some Improvement'

The dollar slumped yesterday as the U.S. government said the economy grew at an annual rate of 0.6 percent last quarter, compared with 4.9 percent the prior three months and the median forecast in a Bloomberg survey for 0.8 percent. U.S. personal spending rose 0.2 percent last month, matching a gain in December that was the smallest since June, according to a Bloomberg survey before the Commerce Department report today.

The U.S. currency has dropped 13 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since September. The U.S. Dollar Index, which tracks the currency against six major counterparts, yesterday touched 73.63, the lowest since its start in 1973. The index is traded on ICE Futures in New York.

``Part of the effect of that depreciation has been that we are at least seeing some improvement in that trade deficit, which is a positive -- a positive factor,'' Bernanke said before a Senate panel yesterday.

Yen Gains

The yen yesterday advanced 2.8 percent to 13.92 per rand and gained 1.2 percent versus the New Zealand dollar as investors reduced carry trades, where they get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between them.

Japan's benchmark rate of 0.5 percent, the industrialized world's lowest, compares with 11 percent in South Africa, 8.25 percent in New Zealand and 7 percent in Australia.

President George W. Bush said yesterday his administration supports a ``strong dollar,'' and the currency's value will be reflected by markets as the economy grows. He spoke at a news conference at the White House.

Euro's Gain

The euro is 30 percent above its debut level, and up 84 percent from a record low of 82.30 U.S. cents in October 2000.

After trading in a range since November of about $1.43 to $1.49 per euro, the dollar's decline gained momentum this week after Fed Vice Chairman Donald Kohn said on Feb. 26 that turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

The dollar weakened past $1.51 per euro on Feb. 27 after Bernanke said the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in a testimony to the House Financial Services Committee.

``He said the Fed is in a more difficult situation than 2001,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He sent a signal that the Fed may be pushing on a string, and they will have to cut rates more aggressively.''

Futures on the Chicago Board of Trade show a majority of traders expect the Fed to cut its benchmark rate to at least 2 percent by mid-year, from 3 percent now. The bank is scheduled to meet next on March 18.

European Central Bank President Jean-Claude Trichet yesterday said ``price stability is a necessary condition'' for ongoing economic expansion and employment. The ECB next meets on March 6 to set its key rate, now at 4 percent.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net.

Last Updated: February 28, 2008 19:39 EST