March 26 (Bloomberg) -- The dollar may decline a second straight day against the euro and yen as traders bet the Federal Reserve will cut its target lending rate by as much as a half- percentage point next month to revive economic growth.

The U.S. currency dropped the most since January 2006 against the euro yesterday after a private report showed consumer confidence fell more than forecast in March, raising concern that the Fed won't be able to avert a recession. A government report today is forecast to show sales of new homes in the U.S. declined last month to the lowest level since 1995.

``The dollar is on the defensive,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. ``It's a quite difficult environment for the dollar and the U.S. economy.''

Against the euro, the dollar traded at $1.5649 at 6 a.m. in Tokyo, after dropping 1.5 percent yesterday. The dollar traded at 99.99 yen, following a decline of 0.8 percent. The euro traded at 156.49 yen, after rising 0.7 percent.

The U.S. currency last week posted its first weekly gain against the euro in a month on speculation the Fed's moves to revive lending among banks would restore confidence in the economy. The Fed on March 18 cut the target lending rate by 0.75 percentage point to 2.25 percent, less than economists forecast.

``The market is taking a reality check: No, nothing has changed,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, the world's largest asset custodian, with oversight of $23.1 trillion. ``The economy in the U.S. will deteriorate further.''

Fed Rate Outlook

Futures on the Chicago Board of Trade showed traders see about a 30 percent chance the Fed will trim the fed funds target by a half-point to 1.75 percent at its April 30 meeting, compared with no chance of that big a move a month ago. The remaining bets are for a quarter-point cut.

Purchases of new homes in the U.S. probably dropped 1.7 percent to an annual rate of 578,000 in February, the lowest level since 1995, from a 588,000 pace the prior month, according to the median forecast in a survey by Bloomberg News. The report from the Commerce Department is set for release at 10 a.m. New York time.

The Icelandic krona surged yesterday against all 177 currencies tracked by Bloomberg News after the central bank raised its benchmark rate 1.25 percentage points to 15 percent at an unscheduled meeting. The krona rose as much as 5.9 percent against the dollar, the most since at least 1992, and 4.9 percent against the euro.

Iceland's Krona

Concern that global credit losses will widen triggered a sell-off in the Icelandic currency last week, causing it to slump 9.3 percent against the euro and touch a record of 127.985 on March 19.

The U.S. currency slipped more than 1 percent against the Australian dollar and New Zealand dollar yesterday on speculation gains in stocks encouraged investors to increase carry trades. In such a trade, investors get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is that currency fluctuations erase profit.

The benchmark rate is 0.5 percent in Japan and 2.25 percent in the U.S., compared with 8.25 percent in New Zealand and 7.25 percent in Australia. The yen fell 0.6 percent against the Australian dollar and 0.3 percent versus the New Zealand dollar.

The Standard & Poor's 500 Index gained 0.2 percent yesterday as a rally in commodity producers helped offset the decline in consumer confidence.

Start of `Run'

The dollar's decline against the euro ``appears to be the start of a run'' to a range of $1.60 to $1.625 over the next two to three weeks, according to Andrew Chaveriat, a currency strategist at BNP Paribas Securities SA in New York. Chaveriat, who uses historical patterns to predict currency price moves, included the forecast in a note to clients yesterday.

The U.S. currency touched $1.5903 against the euro on March 17, the lowest since the European currency debuted in 1999. The dollar will rebound to $1.45 against the euro and 104 yen by year-end as the economy recovers, according to the median forecast of 42 analysts surveyed by Bloomberg News.

The Conference Board's confidence index fell to 64.5, a five-year low, from a revised 76.4 in February, the New York- based research group said yesterday. Economists forecast the measure would fall to 73.5 from a previously reported 75, according to the median estimate in a Bloomberg News survey.

The euro was buoyed before European Central Bank President Jean-Claude Trichet's testimony to the European Parliament's economic and monetary affairs committee today. He said on March 6 that anchoring inflation expectations is the ``highest priority'' after the central bank left its main interest rate unchanged at a six-year high of 4 percent.

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

Last Updated: March 25, 2008 17:18 EDT