Dec. 26 (Bloomberg) -- The dollar may fall 20 percent to 95 yen in 2008 as a housing slump erodes U.S. corporate earnings and consumer spending, forcing the Federal Reserve to cut interest rates, according to Mitsubishi UFJ Securities Co.

``The adjustment in the U.S. housing market has just begun,''' Kazuo Mizuno, chief economist in Tokyo at the unit of Japan's largest publicly traded lender, said in an interview today. ``It will probably bottom out in three or four years. Meantime, this will keep buffeting consumption, employment and the dollar.''

Mizuno's forecast is among the most bearish, with the median estimate of 42 economists for the dollar to fall 3 percent to 110 yen next year. The U.S. currency this year dropped 4 percent as the Federal Reserve cut its benchmark interest rate by 1 percentage point to support the economy.

The dollar traded at 114.15 yen at 2:12 p.m. in Tokyo, compared with 114.13 yen in New York yesterday. The currency last traded below 95 yen in August 1995. Only Deutsche Bank AG, the world's largest currency trader, had a forecast as bearish as Mizuno's in the Bloomberg news survey.

The U.S. currency has weakened against 15 of the 16 most- active currencies this year, reaching a more than two-year low of 107.23 yen on Nov. 26, because of widening credit-market losses and the worst housing slump in 16 years.

Dollar Rebound

The dollar has rebounded in the past four weeks as Merrill Lynch & Co., Morgan Stanley, Citigroup Inc. and Bear Stearns Cos., all based in New York, sold $20 billion in stakes to Asian and Middle Eastern investors to bolster capital eroded by credit-market losses.

The dollar has still declined 8.4 percent against the euro this year as Berkshire Hathaway Inc. Chairman Warren Buffett and Bill Gross, manager of the world's biggest bond fund, both recommended selling dollars and seeking higher returns in the past three months.

The yield advantage on benchmark 10-year U.S. Treasuries over comparable-maturity Japanese government bonds fell to 263 basis points, from 303 basis points at the end of last year.

The dollar depreciated in five of the past six years against the euro, leading Asian and Middle Eastern nations to diversify their reserves. The dollar made up 64.8 percent of central banks' currency reserves in the second quarter, down from 71 percent in 1999, the year the euro made its debut, according to the International Monetary Fund. The euro accounts for 25.6 percent.

``Now is the beginning of the end to dollar standard system,'' Mizuno said.

Housing Slump

The Fed will be forced to cut rates from 4.25 percent to 2.25 percent by the end of 2008, Mizuno said. Interest-rate futures on the Chicago Board of Trade show traders see a 76 percent chance the Fed will cut its benchmark rate to 4 percent at its Jan. 30 meeting.

Home prices in 20 U.S. metropolitan areas slumped in October by the most in at least six years, a private survey may show today, according to a Bloomberg News survey. The S&P/Case- Shiller home-price index, which has data back to 2001, may show prices dropped 5.7 percent in the 12 months that ended October, a 10th consecutive decline, economists forecast.

``The U.S. housing bubble saw prices overshoot,'' Mizuno said. ``The S&P/Case-Shiller home-price index may drop as low as 10 percent in the first half of next year.''

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

Last Updated: December 26, 2007 00:35 EST