Aug. 12 (Bloomberg) -- The dollar traded near a 5 1/2-month high against the euro on speculation tumbling commodity prices will give a boost to the world's largest economy while Europe shows signs of weakness.

The yen and the Swiss franc rose against most of the other major currencies yesterday as concern the U.S. economic slowdown is spreading led investors to reduce holdings of higher-yielding assets and pay back low-cost loans in Japan and Switzerland. Russia's ruble declined to the lowest since February as troops seized a military base in western Georgia.

``The market continues to favor the dollar,'' said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``Oil is getting hammered, and it's feeding into the move. This dollar rally can still carry on.''

The dollar traded at $1.4909 per euro at 6 a.m. in Tokyo, after rising 0.6 percent yesterday and touching $1.4881, the strongest level since Feb. 26. The euro was at 164.10 yen, following a 0.8 percent decline yesterday, when it reached 163.65, the lowest level since June 5. The dollar was little changed at 110.06 yen.

Sterling declined as much as 0.8 percent to $1.9067, the lowest level since November 2006, as a PricewaterhouseCoopers LLP report showed the credit crisis wiped out $1.2 trillion of assets in the U.K. as home prices and equities declined.

Russia's ruble fell as much as 1.6 percent to 24.618 per dollar yesterday, the weakest since Feb. 20, as Russia's military offensive deterred investors from holding the currency.

Stronger Yen

The yen increased 0.9 percent to 67.91 against Brazil's real yesterday, and the franc advanced 0.2 percent to 1.6208 versus the euro, on bets investors exited carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate and Switzerland's 2.75 percent benchmark compare with 4.25 percent in the euro zone and 13 percent in Brazil.

Crude oil fell as much as $2.48 to a 14-week low of $112.72 a barrel yesterday. It has dropped 22 percent since touching the record high of $147.27 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.

``It looks like there's more downside risk to oil prices, and it gives some support to the dollar,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

Should the dollar stay beyond a resistance level of $1.4907 per euro, it may extend to $1.4550, according to Osborne. A resistance level is where selling orders concentrate.

Dollar Index

The Dollar Index rose for a seventh straight day yesterday, the longest stretch since June 2007. It touched 76.362, the highest level since Feb. 20. The index climbed 1.7 percent on Aug. 8, the biggest jump in six years.

Europe's currency sank 2.1 percent versus the dollar that day, the most since September 2000, as traders reduced bets that the European Central Bank will raise interest rates. Last week's 3.6 percent decline in the euro was the biggest weekly drop since January 2005.

French industrial production unexpectedly fell 0.4 percent in June, the National Statistics Office reported yesterday in Paris. The median forecast of 24 economists surveyed by Bloomberg News was for an increase of 0.6 percent.

Germany's Economy

Germany's economy, the largest in the 15-nation region that uses the euro, probably contracted in the second quarter for the first time in almost four years, according to the median forecast of 41 economists surveyed by Bloomberg News. A government report is due Aug. 14.

``We clearly have weaker growth outside the U.S.,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut, in an interview on Bloomberg Television. ``That's enough for the dollar to sustainably gain ground.''

ECB council member Klaus Liebscher said the bank remains focused on the ``worrying'' level of inflation, Market News reported yesterday, citing an interview. He said the ECB was right to raise interest rates in July to a seven-year high, Market News reported.

``Liebscher's comment is an empty threat,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``The market is expecting Europe's growth to slow down further. I don't think the euro will drop at the same speed, but the pressure is still on the euro.''

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 11, 2008 17:09 EDT