Aug. 29 (Bloomberg) -- The dollar declined against the yen as government reports showed consumer spending slowed and personal income dropped in July.

The greenback posted its biggest monthly advance against the euro since the European currency began trading in 1999 and its longest gain versus the yen since 2002. The yen appreciated against all of the other major currencies after Japan's government announced plans to spend about 2 trillion yen ($18 billion) to revive the world's second-largest economy.

``The dollar rally is too far too fast,'' said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. ``All the indications point to weakness in consumer spending.''

The U.S. currency decreased 0.6 percent to 108.83 yen at 4:12 p.m. in New York, from 109.50 yesterday. Against the euro, the dollar climbed 0.3 percent to $1.4669, from $1.4706. The euro dropped 0.9 percent to 159.66 yen, from 161.04.

The greenback rose versus all of the other major currencies this month on speculation the economic slowdown that began in the U.S. is spreading to the rest of the world. The dollar gained 6.4 percent versus the euro, the best performance since the European currency's debut. It increased 0.8 percent versus the yen in August, its fifth straight monthly gain.

Dollar Index

The ICE futures exchange's Dollar Index, which compares the greenback against the currencies of six major U.S. trading partners, rose 5 percent this month. It reached 77.619 on Aug. 26, the highest this year.

Some traders bought the dollar against the euro today to balance their books at month-end, said Steve Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto.

``The market is mainly flow-driven,'' he said.

The pound headed for the biggest monthly decline against the dollar since 1992, when financier George Soros made $1 billion breaking the Bank of England's defense of the currency. Central bank policy maker David Blanchflower said yesterday in an interview with Reuters that the BOE should cut the 5 percent target lending rate.

Sterling fell 0.4 percent to $1.8227, extending its monthly drop to 8.1 percent. The pound slid 0.2 percent to 80.54 pence per euro after touching 80.76 pence, the weakest since April 17. Sterling touched the record low of 80.99 pence on April 16. It has dropped 2.4 percent versus the euro this month.

The yen rose 1.3 percent to 10.01 South Korean won and 1.7 percent to 102.45 versus the Canadian dollar as the Japanese government announced its stimulus plan.

`Boost' to Yen

``The stimulus package in Japan is better than anticipated,'' said Scotia Capital's Butler. ``It gives a boost to the yen.''

Reports today showed Japan's inflation exceeded 2 percent for the first time in a decade after food and oil prices surged and industrial production rose 0.9 percent last month.

The euro has fallen 4.9 percent against the yen in August, the largest monthly drop since March 2004, on a contraction in the European economy in the second quarter.

Europe's annual inflation eased to 3.8 percent this month, from 4 percent in the prior month, the European Commission reported today in Brussels. The European Central Bank tries to keep inflation just below 2 percent.

ECB executive board member Lorenzo Bini Smaghi said in an interview on Bloomberg Television yesterday that inflation in the euro area is ``too high'' and must be brought below the bank's limit. The ECB's main refinancing rate is at a seven-year high of 4.25 percent.

Personal Spending

U.S. personal spending increased 0.2 percent last month after a 0.6 percent advance in June, the Commerce Department said today in Washington. Personal income fell 0.7 percent in July after climbing 0.1 percent in the prior month. The median forecast of 73 economists surveyed by Bloomberg News was for a drop in personal income of 0.2 percent.

The dollar rose against the euro as crude oil for October delivery pared its gain, trading little changed at $115.60 a barrel. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

A measure of U.S. business activity showed expansion at the fastest pace since June 2007. The National Association of Purchasing Management-Chicago's business index increased to 57.9 this month from 50.8 in July. Fifty is the dividing line between growth and contraction.

``The economy is weak, but it's not collapsing,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``In Europe, there's clearly a downward trend for growth and inflation. The overall strategy is to buy the dollar on the dip and sell the euro on the rally.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

Last Updated: August 29, 2008 16:14 EDT