March 19 (Bloomberg) -- The dollar fell against the euro, erasing most of yesterday's gains, on speculation the worst U.S. housing slump in a quarter of a century will swell credit-market losses.

The currency weakened against the Japanese yen and the Swiss franc after Bank of America Corp. predicted the Federal Reserve will lower its target rate by another 75 basis points this year following a reduction to 2.25 percent yesterday. Reports this week on U.S. mortgage demand and manufacturing will probably show the economy is slowing.

``We're approaching a dollar low, but we probably haven't seen it yet,'' said Adrian Schmidt, senior currency strategist in London at Royal Bank of Scotland Group Plc, the fourth-biggest currency trader. ``The market still expects the Fed to cut aggressively,''he said, adding that the U.S. currency may fall to as low as $1.65 before rebounding later this year.

The U.S. currency fell to $1.5757 per euro at 9:59 a.m. in London, from $1.5625 yesterday, when it rose 0.7 percent, the most since Feb. 7. The dollar declined to 98.23 yen, from 99.85 yesterday, when it surged 2.7 percent, the biggest gain since January 1999. The yen traded at 154.76 per euro, compared with 155.95 yesterday.

The dollar declined to 0.9911 Swiss franc from 1.0024. The franc, often favored in times of crisis, has advanced 14 percent this year. The U.S. currency fell 0.3 percent to 92.98 U.S. cents per Australian dollar and slipped 0.6 percent against the New Zealand dollar to 81.19 cents.

Extends Decline

The dollar extended its decline against the euro, the yen and the Swiss franc on speculation some European and U.K. banks were in difficulties.

``There are rumors doing the rounds on various financial institutions being in trouble,'' said Adam Cole, the London-based head of currency strategy at Royal Bank of Canada, the nation's biggest lender. ``European and U.K. banks are rumored to be in trouble.''

HBOS Plc, Britain's biggest mortgage lender, said it has ``ready access'' to funding after the company plummeted in London trading.

``There are no liquidity problems,'' HBOS spokesman Shane O'Riordain said in a telephone interview. ``We have ready access to a deep pool of deposits. We can access the wholesale markets whenever we feel appropriate to do so.''

The yuan rose 0.3 percent, the most this month, to 7.0639 per dollar on speculation China's central bank is stepping up the pace of currency appreciation to curb inflation.

Rate Bets

Futures on the Chicago Board of Trade indicate a 50 percent chance the U.S. central bank will cut its rate by another half point by its June meeting. The odds of a quarter-point cut in April were 38 percent.

Banks are reeling from $195 billion in assets writedowns and credit losses related to the collapse of the U.S. subprime mortgage market since the beginning of 2007, according to Bloomberg data.

Bank of America, the second-largest U.S. bank, cut its forecast for the U.S. currency to 96 yen by June 30, from 98 yen previously because of the slowing economy. The Fed will lower the target rate for overnight lending between banks to 1.5 percent this year, while the Bank of Japan is unlikely to reduce borrowing costs, said Tomoko Fujii, head of economics and strategy for Japan in Tokyo.

``Japanese investors are also losing risk appetite to send money abroad, buffeted by stock-market declines,'' Fujii said.

Dollar sales by Japanese individual investors on the Tokyo Financial Exchange Inc. rose to a record high on speculation the U.S. economy will suffer a recession.

Short Positions

Short positions on the dollar against the yen, wagers the U.S. currency will fall, reached 27,806 contracts yesterday, the most since July 2006, when Japan's largest financial futures market started collecting data. The exchange's share of so-called margin trading, borrowing money to buy and sell currencies, was 8.6 percent in 2007 based on figures from the Financial Futures Association of Japan.

The U.S. economy is facing the worst financial crisis in almost 80 years and interest-rate cuts will do little to cure the problem, Joseph Stiglitz, a Nobel-prize winning economist, said.

U.S. building permits fell to a 16-year low in February, the Commerce Department said yesterday. The Mortgage Bankers Association will report applications to buy a home or refinance a loan later today. The Fed Bank of Philadelphia's manufacturing index for March, due tomorrow, will be minus 18, signaling a fourth month of contraction, according to a Bloomberg News survey of economists.

Mortgage Burden

``More and more Americans are going to walk away from their mortgages, and that's going to undermine the foundations of these banking institutions,'' Stiglitz, a professor at Columbia University, told Radio New Zealand today from Auckland.

Morgan Stanley, the second-biggest U.S. securities firm by market value, will report a 57 percent drop in first quarter earnings today due to a decline in fees for advisory work and underwriting, according to a Bloomberg survey.

The securities firm is likely to join Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. in reassuring investors it has ample cash reserves. Morgan Stanley reported the first loss in its history last quarter.

``Should their earnings fall short of analysts' estimates, this may again trigger stock-market declines and yen appreciation,'' Tohru Sasaki and Junya Tanase, currency strategists in Tokyo at JPMorgan Chase & Co., the third-largest U.S. bank, wrote in a research note today.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: March 19, 2008 06:00 EDT