Jan. 1 (Bloomberg) -- The dollar may extend a two-year decline against the euro on speculation a slowing economy will make U.S. assets less attractive to investors.

The U.S. currency fell versus 14 of the 16 most-actively traded currencies in 2007 as the Federal Reserve reduced borrowing costs three times to temper the worst housing slump since 1991. The unemployment rate probably increased last month to the highest since July 2006, according to the median forecast in a Bloomberg News survey before the government reports the data on Jan. 4.

``The U.S. economy will be pushed close to the recession level,'' said Greg Salvaggio, vice president of capital markets in Washington at currency-trading company Tempus Consulting. ``There will be further dollar weakness in early 2008.''

The dollar lost 9.5 percent against the euro in 2007, dropping to $1.4588, following a 10.2 percent drop in 2006. It increased 0.9 percent yesterday after a report from the National Association of Realtors showed purchases of existing homes unexpectedly rose in November.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the dollar versus the euro, compared with those on a gain -- so-called net shorts -- fell to 30,641 in the week to Dec. 25, from 31,149 the previous week and a record of 120,000 in May, figures from the Washington-based Commodity Futures Trading Commission show.

``One of the larger positions in the market'' in 2007 was bets the euro would rise versus the dollar, ``and that's being reduced,'' said Robert Fullem, manager of corporate foreign exchange sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.

Payroll Report

U.S. payrolls rose by 70,000 last month after increasing 94,000 in November, according to the median forecast of economists surveyed by Bloomberg before the Labor Department's Jan. 4 report. The jobless rate probably increased to 4.8 percent from 4.7 percent in November.

The U.S. currency fell 6.3 percent for the year to 111.55 yen, dropping 0.7 percent yesterday. The euro increased 3.5 percent to 162.78 yen for its eighth straight annual increase.

Since Oct. 31, the yen has appreciated against all of the 16 most active currencies as exchange-rate volatility discouraged carry trades funded in Japan.

In the carry trade, investors borrow in countries with lower lending rates and use the cash to buy assets in nations that offer higher returns. Currency fluctuations can erase the profits.

Implied Volatility

Implied volatility on the three-month dollar-yen option, a gauge of the risk associated with currency bets, reached 10.58 percent yesterday, the highest since Dec. 5.

Japan's benchmark interest rate of 0.5 percent, the lowest in the industrialized world, compares with 11.25 percent in Brazil, 8.25 percent in New Zealand and 4 percent in the 13 nations sharing the euro.

The dollar fell 17 percent versus the Brazil real in 2007 on speculation that growth in U.S. gross domestic product will slow.

The economy will increase at a 1 percent annualized rate in the fourth quarter, down from 4.9 percent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg News from Dec. 3 to Dec. 10.

The Fed cut its benchmark lending rate by a total of 1 percentage point to 4.25 percent in three steps in 2007 beginning in September. The European Central Bank increased its rate two times last year to 4 percent.

The chance the Fed will cut the target rate for overnight lending between banks a quarter-percentage point at its Jan. 30 meeting has risen to 92 percent from 76 percent a week ago, according to futures on the Chicago Board of Trade.

The U.S. currency will trade at $1.45 against the euro and 110 against the yen by the end of March, according to the median forecasts of 42 analysts and brokerages surveyed by Bloomberg.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: December 31, 2007 16:53 EST