Oct. 21 (Bloomberg) -- The dollar weakened beyond $1.50 per euro for the first time in 14 months as optimism the global economic recovery is gathering momentum increased demand for riskier assets at the expense of the greenback.

Sterling rose to a five-week high after Bank of England Governor Mervyn King wrote in a newspaper opinion piece that “it would be wise” to take into account the prospect of higher interest rates. European Central Bank President Jean-Claude Trichet said this week that “excessive volatility” in currencies is “bad” for economic development.

“This has enormous psychological significance,” said Michael Woolfolk, a managing director at Bank of New York Mellon Corp. in New York. “It opens the way for further gains above $1.50, which is overwhelmingly market consensus.”

The dollar declined 0.3 percent to $1.4994 per euro at 4:01 p.m. in New York, from $1.4945 yesterday. It touched $1.5046, the weakest level since August 2008. The dollar slid 1.2 percent to $1.6578 per pound, from $1.6382, after reaching $1.6637, the weakest since Sept. 15. The U.S. currency gained 0.1 percent to 90.89 yen, from 90.78. The euro advanced 0.5 percent to 136.34 yen, from 135.66.

The greenback reached a 2 1/2-year high against the euro on Oct. 28, 2008, as investors sought the safety of U.S. government debt after the Sept. 15, 2008, bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

The dollar plunged 18 percent from that level as efforts by global central banks restored liquidity and signs of economic recovery encouraged investors to sell the greenback and buy higher-yielding assets.

Fed Rate Outlook

The U.S. currency will remain under pressure as the Federal Reserve trails other central banks in increasing borrowing costs as the global economy recovers, according to traders.

“What’s hurting the dollar is it’s the No. 1 funding currency for the world,” said Paresh Upadhyaya, who helps manage $21 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “I won’t be surprised to see the euro-dollar move to the mid-$1.50s within the next three months.” The euro rose to $1.6038 on July 15, 2008, the highest level since its 1999 debut.

San Francisco Fed President Janet Yellen reiterated yesterday the central bank’s plan to leave rates low for an extended period, while maintaining it has the ability to tighten policy at the right time.

The dollar declined 1.2 percent to 1.7344 Brazilian reais and fell 0.6 percent to 5.5585 Norwegian kroner as the global economic recovery outlook encouraged carry trades, in which investors sell the currency of a nation with low borrowing costs and buy assets where returns are higher.

Borrowing Costs

The Fed’s target lending rate of zero to 0.25 percent compares with 8.75 percent in Brazil, 1.25 percent in Norway and 1 percent for the nations that use the euro.

The central bank said in its Beige Book business survey that its 12 district banks saw “stabilization or modest improvements” in many areas of the economy, led by housing and manufacturing, while all regions reported a weak or declining commercial real estate market.

European officials voiced concern this week that the euro’s gain versus the dollar makes the 16-nation region’s exports more expensive to overseas buyers.

An exchange rate of $1.50 for the currency “is a disaster for the European economy and manufacturing sector,” said Henri Guaino, counselor to French President Nicolas Sarkozy, at a conference in Paris yesterday.

Trichet told reporters in Luxembourg on Oct. 19 after a meeting of European finance ministers that officials in the euro area take seriously the U.S. commitment to preventing the dollar from depreciating too much.

Geithner on Dollar

Treasury Secretary Timothy Geithner said following the Group of Seven meeting on Oct. 3 that it’s “very important” for the U.S. to have a strong dollar.

Sterling strengthened versus the dollar as the Bank of England’s King wrote in an opinion piece published today by the Herald newspaper of Scotland that interest rates will have to rise “at some point.”

The Bank of England’s Monetary Policy Committee voted 9-0 at its Oct. 8 meeting to keep the 0.5 percent main rate and its 175 billion pound ($286 billion) asset-purchase program unchanged, minutes showed today.

New Zealand’s dollar climbed to the strongest level in 15 months as Radio New Zealand reported that Reserve Bank Governor Alan Bollard said currency strength won’t forestall higher borrowing costs.

‘Intense Speculation’

“Bollard’s comments have led to more intense speculation about when the RBNZ will start hiking rates, and have opened the way for more currency gains,” said Sonja Marten, a currency strategist in Frankfurt at DZ Bank AG.

The dollar slid as much as 1.8 percent to 76.35 U.S. cents against New Zealand’s currency, the weakest level since July 2008. It declined 0.2 percent to 92.60 U.S. cents versus the Australian currency.

The Australian and New Zealand dollars gained 4 percent and 2.8 percent, respectively, versus their U.S. counterpart since Oct. 6, when the Reserve Bank of Australia lifted its cash target by a quarter-percentage point to 3.25 percent, becoming the first central bank among the Group of 20 nations to raise interest rates since the financial crisis began.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, Swiss franc, pound, Swedish krona and Canadian dollar, fell as much as 0.8 percent to 74.940, the lowest level since August 2008.

The greenback is likely to stay the world’s dominant reserve currency in the near term, World Bank President Robert Zoellick told reporters in Washington. Its status over the longer term depends on fiscal and monetary policy, he said.

“The dollar as a reserve currency is a national blessing and people ought to preserve it, but that’s a longer-term issue,” Zoellick said.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net

Last Updated: October 21, 2009 16:06 EDT