Dec. 28 (Bloomberg) -- The dollar may fall for a second consecutive day against the yen and euro before U.S. reports that are forecast to show consumer confidence dropped and existing home sales slowed.

Signs of weakening growth may boost speculation the Federal Reserve will cut interest rates next quarter, dimming the allure of dollar-denominated assets. The U.S. currency has dropped 9.7 percent this year versus the euro as investors bet the Fed will trail the European Central Bank in raising borrowing costs.

``Selling pressure will remain on the U.S. dollar,'' said Alex Sinton, a currency trader at ANZ National Bank Ltd. in Auckland. ``The U.S. will cut interest rates in the first quarter. The housing market doesn't look particularly attractive.'' The dollar will drop to $1.35 per euro and 114 yen in the next six months, he said.

The dollar traded at 118.64 yen at 7:15 a.m. in Tokyo from 118.87 yesterday. The U.S. currency also traded at $1.3129 per euro from $1.3115. The Japanese currency traded at 155.75 per euro from 155.88.

The Conference Board's index of sentiment will probably drop to 102 this month from 102.9 in November, according to the median forecast of 50 economists surveyed by Bloomberg News. The report will be released at 10 a.m. New York time.

A separate report may show exiting home sales slowed to an annualized rate of 6.19 million in November from 6.24 million a month earlier, based on the median estimate of 53 economists in a Bloomberg survey.

5.25 Percent

The Fed has left borrowing costs at 5.25 percent for the past four policy meetings, after a two-year cycle of rate increases. The ECB has raised rates six times in a year, to 3.5 percent. The Bank of Japan lifted its benchmark in July for the first time in almost six years, to 0.25 percent.

Interest-rate futures yesterday showed traders see a 17 percent chance the Fed will lower its overnight target lending rate between banks by a quarter-percentage point to 5 percent in March, up from 11 percent on Dec. 15.

``We do see Fed rate cuts next year, because a slowdown in the housing market will affect consumption,'' said Hans Guenter Redeker, head of currency strategy in London at BNP Paribas SA. ``The dollar is going to lose support from an interest-rate perspective.''

The dollar pared some of its losses yesterday after a government report showed sales of new homes rose to an annual rate of 1.047 million last month from a revised 1.013 million in October. It compared with the median forecast of 1.018 million in a Bloomberg survey.

Press Report

The yen gained the most in more than three weeks against the dollar yesterday and advanced versus the euro after a Jiji Press report suggested the BOJ will push rates higher at its January meeting because of better-than-expected data yesterday.

Housing starts in Japan rose to an annualized rate of 1.358 million in November from 1.309 million a month earlier. It compared with the median forecast of 1.297 million in a Bloomberg survey.

Japan's economy is in a stable recovery and is likely to weather the slowdown in U.S. growth, BOJ Governor Toshihiko Fukui told Dow Jones Newswires in an interview yesterday.

`Yen Strength'

``I think the BOJ will raise rates next quarter,'' said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million worth of funds under management. ``The story for the first half of 2007 is going to be yen strength.''

Traders raised bets yesterday that the BOJ will boost interest rates next quarter. The yield on the March euroyen futures contract rose to 0.67 percent from 0.63 percent in the previous two days, which was the lowest since Sept. 28.

The dollar dropped the most in more than a week against the euro yesterday after the head of the United Arab Emirates central bank said it will convert some of its reserves of U.S. assets into the European currency.

The U.A.E. is among oil exporters including Iran, Venezuela and Indonesia that are looking to shift their reserves into euros or price the commodity in the 12-nation currency.

``The report is hard evidence that diversification is happening,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``This is negative for the dollar in a broad sense as it reflects falling confidence in the currency.''

The U.A.E. will switch 8 percent of its foreign-exchange reserves from dollars into euros before September, U.A.E. Central Bank Governor Sultan Bin Nasser al-Suwaidi said during a Dec. 24 interview in Abu Dhabi. The U.A.E. has started ``in a limited way'' to sell part of its dollar reserves, he said.

The total value of the U.A.E.'s current reserves is $24.9 billion, 98 percent in dollars and 2 percent in euros, al-Suwaidi said.

To contact the reporters on this story: Min Zeng in New York at mzeng2@bloomberg.net; Chris Young in Sydney at cyoung12@bloomberg.net

Last Updated: December 27, 2006 17:18 EST