July 24 (Bloomberg) -- The euro dropped for a fourth day against the yen as business confidence in Germany, Europe's largest economy, fell the most since the 2001 terrorist attacks.

The dollar also rose to the highest in a month against the yen after U.S. lawmakers approved a bill that allows Treasury Secretary Henry Paulson to bail out Fannie Mae and Freddie Mac, the two biggest U.S. mortgage-finance companies. The pound slid to the lowest in more than a week against the dollar as U.K. retail sales fell in June by the most since at least 1986.

``The market's now going to concentrate on sharply slowing growth in euroland and on the currencies where policy is the tightest,'' said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. ``Perhaps the European Central Bank won't have to wait until inflation comes down'' to lower interest rates.

The euro slid to $1.5677 as of 6:50 a.m. in New York, from $1.5698 yesterday, and traded at $1.5638, the weakest since July 8. It declined to 168.95 yen, from 169.36 yesterday, when it traded at a record high of 169.96. The dollar was at 107.77 yen, from 107.90 yesterday. It earlier reached 107.99, the highest since June 26.

The euro will fall to $1.50 by the end of the third quarter, according to RBS.

The euro fell for a third day versus the dollar and a fourth day versus the yen after the Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 97.5, the weakest since September 2005, from 101.3 in June. Economists expected a drop to 100.1, according to the median of 40 forecasts in a Bloomberg News survey.

`Limited Upside'

``The upside to euro-dollar now seems limited given weakening economic numbers out of the eurozone,'' said Antje Praefcke, a currency strategist in Frankfurt for Commerzbank AG, Germany's second-biggest lender. The euro may trade at about $1.58 and break above 170 yen in the ``near term,'' she said.

Traders pared bets the ECB will increase interest rates a second time this year, with the implied yield on the December Euribor futures contract falling 8 basis points to 5.13 percent today. The Frankfurt-based central bank raised its key rate to a seven-year high of 4.25 percent on July 3.

The pound weakened from the highest level against the euro in seven weeks after British retail sales dropped in June by 3.9 percent as accelerating inflation prompted consumers to cut spending. The pound fell to $1.9863, from $2.000, and to 78.91 pence per euro, from 78.50 pence.

Dollar Index

The Dollar Index on the ICE market, which tracks the greenback against the currencies of six U.S. trading partners, rose for a third day, to 72.861, near the strongest level since July 9.

Crude oil for September delivery was at $124.84 a barrel, following a 2.7 percent decline yesterday. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

The House of Representatives yesterday approved a rescue package that gives Paulson authority to buy shares in and lend funds to Fannie Mae and Freddie Mac, and provides for a federal agency to insure refinanced home loans. The bill has still to pass through the Senate.

The dollar fell to a record $1.6038 per euro on July 15 as traders speculated that Fannie and Freddie, which own or guarantee almost half of the $12 trillion in outstanding U.S. home loans, would be forced to seek a bailout.

Rate Bets

``A week ago the market was looking into the abyss,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ``Now people are able to take a step back. The dollar is firming.''

Futures traded on the Chicago Board of Trade showed a 47 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 34 percent odds a week ago. Policy makers next meet Aug. 5.

All 12 of the Fed's regional bank districts reported ``elevated or increasing'' prices in June and July, the central bank said in its regional economic survey, known as the Beige Book for the color of its cover.

Philadelphia Fed President Charles Plosser said yesterday that he couldn't rule out an increase in borrowing costs even as housing prices drop.

``The question becomes how long are we willing to allow the pressure from a fairly accommodative monetary policy stance'' to last ``before it begins to feed broad-based inflation,'' Plosser said in an interview with Bloomberg News.

U.S. Housing Slump

Dollar gains may be held back by reports today and tomorrow that are expected to add to evidence of a U.S. housing slump.

The National Association of Realtors will today say sales of previously owned homes fell to a 4.94 million annual pace in June, from 4.99 million in May, a Bloomberg survey showed. The Commerce Department will tomorrow report sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, a separate survey shows.

``Markets are in a state of excessive euphoria about the U.S. economy and the dollar,'' said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's largest lender by market value. ``As long as house prices keep falling, the economy cannot climb out of a slowdown. I still expect the Fed's next move is a rate cut.''

The U.S. currency may fall to 103 yen in three months, Hayashi said.

Japan Exports

Any gains in the yen may be limited by speculation a slowing economy will prevent the Bank of Japan from raising interest rates from 0.5 percent, the lowest among industrialized economies.

Japanese exports unexpectedly fell 1.7 percent in June from a year earlier, the Finance Ministry said earlier today in Tokyo, marking the first decline in more than four years.

It's appropriate for the BOJ to put more emphasis on downside risks to the economy, central bank board member Atsushi Mizuno said today in Aomori, northern Japan.

``This reinforces the view that the yen will remain a low- yielding currency,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former BOJ currency trader. ``We're expecting the economy to contract in the second quarter. The BOJ isn't thinking about a near-term rate hike.''

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.

Last Updated: July 24, 2008 06:57 EDT