March 25 (Bloomberg) -- The dollar fell the most against the euro in two weeks on speculation industry reports will show U.S. consumer confidence dropped to a five-year low and the housing slump deepened.

The dollar dropped from a one-week high against the yen as Deutsche Bank AG economists joined those forecasting the economy will suffer a recession. The U.S. currency also weakened against the Australian and New Zealand dollars, favorite targets of so- called carry trades, as a rally in European and Asian stocks encouraged investors to buy higher-yielding assets.

``Interest rates will continue to come down and that means that the dollar is going to continue to weaken in the short term,'' said Peter Rosenstreich, the chief market analyst at ACM Advanced Currency Markets SA in Geneva. ``Our base case scenario is very much grounded in the U.S. going into recession and probably deeper and longer than we had expected.''

The dollar fell to $1.5544 per euro at 10:12 a.m. in London, the biggest drop since March 12 based on closing prices, from $1.5423 late yesterday in New York. It declined to 100.51 yen, from 100.74 yesterday. The euro rose to 156.24 yen, from 155.39. The pound gained to $1.9915 from $1.9855. The dollar will fall to $1.58 per euro in coming weeks, Rosenstreich forecast.

Against the Australian dollar, also known as the Aussie, the U.S. currency weakened to 91.36 U.S. cents, from 90.59 cents yesterday. It declined to 80.39 U.S. cents per New Zealand dollar from 79.77 cents and dropped 2.1 percent versus the Korean won, to 976.6.

Stocks Rally

The yen also fell 0.6 percent to 91.82 per Australian dollar and 0.5 percent to 80.81 per New Zealand dollar. The MSCI World Index added 1.7 percent to 1,440.78 after JPMorgan Chase & Co. quadrupled its bid for Bear Stearns Cos. to about $10 a share, bolstering confidence in financial assets.

``People want to believe there's a bit more calm in the markets,'' said Toru Tokoyoda, head of foreign-exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm by market value. ``That brings yield differentials into focus, which tends to favor the euro against the dollar. This is a type of dollar carry trade.''

In carry trades, traders get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two. The risk is currency fluctuations erase profit. The benchmark interest rate is 0.5 percent in Japan and 2.25 percent in the U.S., compared with 8.25 percent in New Zealand and 7.25 percent in Australia.

The implied volatility of the three-month dollar-yen option was at 16.7 percent, after touching 24 percent last week, the most since January 1999. The gauge, quoted by traders as part of setting option prices, reflects expectations for currency swings.

U.S. Rate Outlook

Before today's slump, the dollar had rebounded as much as 5 cents from $1.5903 per euro on March 17, the lowest level since the European currency made its debut in 1999. The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, fell to 72.533 today from 72.949. It reached a record low of 70.698 on March 17.

The Federal Reserve on March 18 cut the target rate for overnight lending between banks by 0.75 percentage point to 2.25 percent. Futures contracts on the Chicago Board of Trade show there's a 72 percent chance the Fed will trim it by a quarter- percentage point at its April 30 meeting. The remaining odds are for a half-point cut.

The Conference Board confidence index, due at 10 a.m. in New York, fell to 73.5 in March from 75 in February, according to a Bloomberg survey of economists. The S&P/Case-Shiller 20-city home-price index, due at 9 a.m., will fall 10.5 percent in January from a year earlier, a separate survey shows.

Recession Watch

Money supply growth is weakening the dollar, providing a stimulus to an economy entering a recession, Alan Brown, head of investments at Schroders Plc, which manages about $280 billion, said in a Bloomberg Television interview.

``We've got to see order restored to the financial markets before we can feel confident that this will prove to be a normal- style recession,'' Brown said.

The yen rebounded after falling as low as 101.03 a dollar as some traders bought to protect options that would become worthless should the Japanese currency weaken beyond that level, said Masashi Matsuzawa, a senior currency dealer at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender. Options give holders the right to buy or sell a currency at a set price at a fixed future date.

The euro extended gains before European Central Bank President Jean-Claude Trichet testifies to the European Parliament's economic and monetary affairs committee tomorrow. He said on March 6 anchoring inflation expectations is the ``highest priority'' after the central bank left its main interest rate unchanged at a six-year high of 4 percent.

He will ``remain hawkish against inflation risks,'' said Koji Fukaya, a senior currency strategist at Deutsche Securities, the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``The euro has an upside risk with his speech.''

The euro may rise to $1.57 against the dollar this week, Fukaya said.

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

Last Updated: March 25, 2008 06:13 EDT