Jan. 16 (Bloomberg) -- The dollar traded at the lowest level since 2005 against the yen after a decline in U.S. retail sales bolstered speculation the economy is headed for recession.

Traders also pushed the dollar to the weakest ever versus the Swiss franc on speculation the Federal Reserve will cut its target interest rate as much as 0.75 percentage point this month to sustain economic growth. The yen rose yesterday against all of the 16 most-actively traded currencies on concern that dimming demand from the U.S., Japan's biggest export market, will reduce Japanese investors' appetite for overseas purchases.

``The dollar is in trouble,'' said David Mozina, a senior currency strategist at Lehman Brothers Holdings Inc. in New York. ``The continued implosion of interest-rate support is pressuring the dollar.''

The U.S. currency traded at 106.78 yen at 6:47 a.m. in Tokyo, after falling yesterday to the lowest since June 2005. The yen advanced to 158.07 per euro, reaching the strongest since September. The yen extended its gain in late New York trading after a revenue forecast from Intel Corp., the world's biggest chipmaker, missed analysts' estimates. The shares dropped more than 10 percent.

The euro traded at $1.4801, after rising yesterday to within a cent of its record of $1.4967 reached in November. Traders' buying of yen versus the euro pulled the euro lower versus the dollar, said John McCarthy, a director of currency trading at ING Financial Markets LLC in New York.

The Swiss franc reached an all-time high of 1.0856 per dollar yesterday.

`Fueling Risk Aversion'

The dollar's decline began earlier as Citigroup Inc. posted a record quarterly loss of $9.83 billion, raising concern that financial companies' losses from home-loan defaults will mount.

Retail sales fell 0.4 percent last month, after increasing 1 percent in November, the Commerce Department said. The median forecast in a Bloomberg survey was for sales to be flat. Producer prices increased 6.3 percent in December from a year earlier, after a 7.2 percent pace in November, the government said separately.

``The U.S. housing and financial crises are fueling risk aversion in the market and people are covering'' bets against the yen, said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The Japanese economy has difficulties, but the yen is more affected by investment flows'' from Japanese investors.

Fed funds futures contracts on the Chicago Board of Trade show a 100 percent likelihood the Fed will cut its target rate for overnight bank loans to at least 3.75 percent this month, from 4.25 percent now. The chance of a cut to 3.5 percent is 44 percent, compared with zero a week ago.

Jan. 30 Meeting

The Fed is next scheduled to announce a decision on rates on Jan. 30. The bank may lower rates before then, though Lehman's base case is for a half-point cut at the meeting, Mozina said.

European Central Bank President Jean-Claude Trichet kept the main refinancing rate at 4 percent on Jan. 10 and said the central bank will ``not tolerate'' an inflation spiral. The Fed's target hasn't been below the euro region's since 2004.

At 3.68 percent, the benchmark U.S. 10-year Treasury yields 2.25 percentage points higher than similar-maturity Japanese government bonds, the smallest difference since 1994, according to data compiled by Bloomberg.

``A stronger yen is reflecting the declining expectations of global growth,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The recession risk in the U.S. is higher now. The dollar-yen is the right trade.''

Volatility Helps Yen

Japan's currency will trade at 107 per dollar by year-end, according to the median estimate of 47 strategists surveyed by Bloomberg. Deutsche Bank AG, the world's biggest currency trader, predicted the yen will advance to 100 by Dec. 31.

With that forecast, the yen would eclipse levels that led Japan to sell 14.8 trillion yen ($137 billion) in the first quarter of 2004, the last time it intervened in currency markets.

Increasingly volatile exchange rates are prompting traders to buy yen to repay loans in the Japanese currency that were then used to purchase higher-yielding assets. Japan's benchmark is 0.5 percent.

At 10.6 percent, volatility in major currencies is a third higher than its average over the past year, according to JPMorgan Chase & Co.'s G7 Volatility index. The measure reached 13.4 percent in August, the highest since 1999.

Santa Clara, California-based Intel said first-quarter sales will be between $9.4 billion and $10 billion. Analysts surveyed by Bloomberg estimated sales of $10.1 billion.

The British pound rebounded from a record low versus the euro after U.K. inflation held above the Bank of England's 2 percent target for a third month in December.

The pound rose 0.8 percent to 75.44 pence per euro, from 76.01 pence yesterday and a record low of 76.14 pence earlier.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: January 15, 2008 16:57 EST