Aug. 15 (Bloomberg) -- The dollar posted a fifth weekly gain against the euro, its longest winning streak in more than two years, as crude oil prices declined and the European and Japanese economies contracted.

The U.S. currency rose to the strongest level in almost six months against the euro and a seven-month high versus the yen. The pound dropped for an 11th day against the dollar, the longest run of declines in at least 37 years, on speculation a recession will force the Bank of England to cut interest rates.

``We have seen some fairly open signs of the slowdown starting to emerge in Europe and Japan,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Although the U.S. economic outlook is not all that brilliant, on a relative-value basis the dollar is looking a bit undervalued here.''

Against the euro, the dollar rose 1 percent to $1.4684 at 4:29 p.m. in New York, from $1.4826 yesterday. It reached $1.4659, the strongest level since Feb. 20. The U.S. currency increased 0.7 percent to 110.47 yen, from 109.74. It earlier rose to 110.66, the strongest since Jan. 2. The euro fell 0.3 percent to 162.23 yen, from 162.68.

The U.S. currency rose 2.1 percent against the euro this week in its longest stretch of weekly gains since February 2006. It advanced 0.3 percent versus the yen, its second straight weekly increase. The euro posted a fourth weekly decline against the yen, dropping 2 percent, the biggest decrease since May.

Bets on Dollar

Futures traders bet for the first time since March 2007 that the dollar will advance against the euro. The difference in the number of wagers by hedge funds and other large speculators on a gain in the dollar compared with those on a decline, known as net longs, was 24,060 on Aug. 12, compared with net shorts of 20,886 a week earlier, the Washington-based Commodity Futures Trading Commission said.

Sterling fell 0.4 percent to $1.8627 today after touching $1.8512, the lowest level since July 2006. The stretch of daily declines is the longest since at least January 1971. The pound fell 3 percent this week in the biggest weekly drop since July 2005. The Bank of England cut its forecast for growth this week, signaling it may reduce the 5 percent target lending rate.

Mexico's peso fell to one-month low after the central bank said easing commodity prices and slower economic growth may reduce the need for further tightening after raising the benchmark interest rate by a quarter-percentage point to 8.25 percent. The currency dropped 0.2 percent to 10.1852 per dollar after touching 10.2275 per dollar, the weakest since July 18. The peso posted a weekly decline of 0.3 percent.

The dollar advanced today beyond its 55-week moving average against the euro for the first time since April 2006.

Resistance Level

Strengthening through the $1.4680 resistance level, the dollar may appreciate toward $1.4415, which is at a trend line that tracks the currency's decline since October 2006, wrote Andrew Chaveriat, an analyst in New York at BNP Paribas SA, in a research report today. He uses charts to predict currency moves. A resistance level is where buy orders concentrate.

Lehman Brothers Holdings Inc. turned more bullish on the dollar yesterday, predicting it will advance to $1.43 by year- end and $1.40 by the end of March 2009, compared with previous forecasts of $1.50 and $1.48.

The euro may be further undermined by Europe's proximity to the conflict between Russia and Georgia, said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

``Boris the Bear may be stretching his claws,'' he said. ``That would be more negative to Europe than the U.S.''

Europe's GDP

Europe's gross domestic product fell 0.2 percent in the second quarter, the first contraction since the 15-nation common currency was introduced in 1999, the European Union's statistics office said yesterday. Japan's economy shrank at an annual rate of 2.4 percent in the second quarter, the Cabinet Office said this week.

Crude oil for September delivery declined $1.26 to $113.75 a barrel today, extending its decline to 23 percent since reaching a record $147.27 a barrel on July 11. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they move in lockstep.

Federal Reserve Bank of Atlanta President Dennis Lockhart said in an interview on Bloomberg Television that the drop in oil prices should help slow inflation, while economic weakness may continue into 2009.

Dollar Index

The Dollar Index traded on the ICE futures market, tracking the greenback against the currencies of six U.S. trading partners, reached 77.268 today, the highest since Jan. 22.

Dropping from an all-time high of 82.30 cents per euro set in October 2000, the dollar lost almost half of its value when it touched the record low of $1.6038 last month.

``We were in a seven-plus-year bear market for the dollar, and that pretty clearly is coming to an end,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in an interview on Bloomberg Television. ``Has the rebound come a little bit too far, too fast? Yes, we think that's probably the case also.''

Two-year U.S. Treasury notes yielded 1.61 percentage points less than comparable-maturity German bunds. When the yield spread was at this level June 13, the dollar traded at $1.5380 per euro, 7 cents weaker than now.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

Last Updated: August 15, 2008 16:32 EDT