March 3 (Bloomberg) -- The dollar declined to a three-year low against the yen on speculation banks will report more losses from the collapse of the U.S. subprime-mortgage market.

The currency fell for a fifth day, dropping below 103 yen for the first time since January 2005, and was within 1 cent of its weakest ever against the euro as stocks dropped and the cost of protecting corporate debt from default rose to record highs. The dollar slipped before an industry report forecast to show manufacturing in the U.S. dropped to the lowest level since April 2004.

``Dollar risks are here to stay,'' Benedikt Germanier, a Stamford, Connecticut-based currency strategist at UBS AG, the second-biggest currency trader, wrote in a note to clients. Investors ``are reducing dollar exposure with U.S. downside growth risks,'' he said.

The dollar weakened to 102.62 yen, the lowest since Jan. 28, 2005, before trading at 102.89 at 6:42 a.m. in New York, from 103.74 on Feb. 29. It traded little changed at $1.5180 per euro at the end of last week, when it reached $1.5239, the lowest since the European currency's debut in January 1999.

The yen gained the most versus the South African rand and the Taiwanese dollar as credit-market losses prompted investors to reduce holdings of higher-yielding assets financed with loans from Japan. The yen advanced 2 percent to 12.9786 per rand and 1.4 percent against the Taiwanese currency to 3.309.

The New Zealand and Canadian dollars also rose versus the U.S. currency as the price of gold climbed to a record and crude oil traded near $101 a barrel.

`Free-Fall'

``The dollar is in a clear free-fall, down versus every major and emerging-market currency,'' Jan Loeys, head of global- market strategy at JPMorgan Chase & Co. in London, wrote in a note to clients. ``The rate story is the dollar's Achille's heel.''

Japanese consumer finance firm Takefuji Corp. said today it may report losses of as much as 30 billion yen ($289 million) on subprime-related derivatives transactions. The yen gained to 156.20 per euro from 157.46.

``Risk aversion is clearly the dominant theme in the market and that's punishing the dollar,'' said Michael Klawitter, a currency analyst in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``We're in an environment of plummeting equities and soaring default protection costs.''

Asians Slump

Asian currencies slumped against the dollar on speculation a U.S. slowdown will spread to the region. South Korea's won weakened 0.8 percent to 946.80 per dollar, the biggest one-day decline since November. The Singapore dollar declined 0.1 percent from late Asian trading on Feb. 29 to S$1.3938.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 25 basis points to 622.5 today, according to Lehman Brothers Holdings Inc. The index is a benchmark for the cost of protecting bonds against default and an increase indicates deterioration in the perception of credit quality.

Japan's benchmark rate of 0.5 percent, the lowest among industrialized nations, compares with 8.25 percent in New Zealand and 11 percent in South Africa. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

Risk Reversals

The one-month 25-delta risk reversal rate for dollar-yen options increased to minus 3.35 percent from minus 2.95 percent at the end of last week. Delta measures the change in an option's value relative to currency moves. A negative risk reversal rate indicates greater demand for yen call options that grant the right to buy over put options that grant the right to sell.

``The rapid move lower in the dollar against the yen in particular is fueling speculation of a break in the key 100 level for the first time since 1995,'' Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London, wrote in a note to clients. ``It is notable that rhetoric from Japanese officials has been non-existent.''

The U.S. currency tumbled 2.3 percent against the euro in February, its biggest monthly decline since September. The synthetic euro, which estimates the European currency's value before 1999, rose to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

The dollar also fell before speeches by Federal Reserve policy makers today. Fed Chairman Ben S. Bernanke said last week the currency's drop was helping cut the trade deficit.

Fed Speakers

``Fed officials are likely to reiterate Bernanke's dovish comments,'' said Greg Gibbs, a strategist at ABN Amro Holding NV in Sydney. ``These events pose downside risks for the dollar.''

Philadelphia Fed President Charles Plosser speaks on monetary policy in Arlington, Virginia at 8 a.m. local time. Fed Governor Randall Kroszner will talk on risk management at 2 p.m. in Washington. Both are voters on the Federal Market Open Committee.

Traders raised bets that Fed will lower the key interest rate three quarters of a percentage point at its March 18 meeting. Fed fund futures contracts on the Chicago Board of Trade show 72 percent odds the Fed will cut 75 basis points to 2.25 percent. A week ago, the odds were 2 percent.

U.S. policy makers have lowered the target rate 2.25 percentage points since September, while the European Central Bank has kept its benchmark at a six-year high of 4 percent as inflation accelerated. A report today showed inflation in Europe last month held at the highest level since the euro's debut.

Dollar Index

The index measuring the dollar against the currencies of six major trading partners fell to a record low today. The U.S. Dollar Index traded on ICE Futures in New York slid to 73.44, the lowest since the gauge started in 1973. The Institute for Supply Management will say its manufacturing index declined to 48 in February from 50.7 in January, indicating a contraction, according to a Bloomberg News survey.

The dollar dropped to a record low of 1.0309 Swiss francs today, before trading at 1.0402, from 1.0412 on Feb. 29. It also fell to C$0.9847 against the Canadian dollar from C$0.9878.

The U.S. currency slipped versus Norway's krone, which some traders are buying as a refuge from mounting losses in the credit markets. Norway's currency is trading at its strongest level in a generation. The dollar decreased 0.1 percent to 5.2097 kroner.

Futures traders increased their bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by large speculators on a euro advance compared with those on a decline, so-called net longs, was 31,778 on Feb. 26, compared with 14,730 a week earlier.

The euro may extend its rally to as high as $1.57, based on charts that predict price movements, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

The currency's gain against the dollar last week through so- called resistance between $1.4955 to $1.4965 and above the $1.50 ``psychological'' level sets up a ``target'' from $1.5620 to $1.57, Edgeley wrote in a research report dated yesterday.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: March 3, 2008 06:51 EST