July 11 (Bloomberg) -- The dollar headed for a weekly loss against the euro on speculation U.S. consumer confidence fell to a 28-year low, giving the Federal Reserve less reason to raise interest rates this year.

The U.S. currency traded near a 25-year low versus the Australian dollar after Treasury Secretary Henry Paulson told lawmakers yesterday financial markets will take ``additional time'' to stabilize. The dollar's declines were limited by speculation of the U.S. government won't allow Fannie Mae and Freddie Mac, the two largest buyers of U.S. home loans, to fail.

``The nervousness about the U.S. financial sector has caused to destabilize the dollar,'' said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the third-largest Dutch bank. ``This has helped euro bulls to get back the ascendancy.''

The dollar traded at $1.5798 per euro as of 7:24 a.m. in New York, from $1.5788 yesterday, when it fell to $1.5801, the weakest since July 3. It ended last week at $1.5706. The U.S. currency was at 107.03 yen from 107.07 yen yesterday and 106.80 yen a week ago. The euro traded at 169.08 yen from 169.05 yen yesterday and 167.73 yen on July 4. It was at 169.46 June 26, the highest level since its inception.

Against the euro, the dollar will trade between $1.54 and $1.5850 in the coming two months, said Stretch, as weakness in the euro-region economy limits gains in the single currency.

U.S. Discussions

The U.S. government is discussing placing Fannie and Freddie in a conservatorship, under which their losses would be covered by taxpayers, according to a person familiar with the discussions who spoke on condition of anonymity.

``Financial turmoil is ongoing'' so more U.S. regulation of securities firms is needed, Fed Chairman Ben S. Bernanke said in testimony before the House Financial Services Committee yesterday. Paulson reiterated a desire for a ``strong dollar,'' saying the currency should reflect the U.S. economy's ``long- term'' fundamentals.

The dollar has fallen 11 percent against the euro since Sept. 18, when the Fed made the first of seven reductions in its target rate for overnight lending between banks to help avert a recession. The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, fell as low as 72.368, the lowest level since July 2.

The euro also strengthened versus the U.S. currency as crude oil climbed to a record. Crude for August delivery rose as much as 3.1 percent to $145.98 a barrel on the New York Mercantile Exchange. Yesterday, it soared 4.1 percent, the biggest one-day increase since June 6.

Dollar-Oil Correlation

The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

``The correlation reached the highest level this decade,'' David Woo, London-based global head of currency strategy at Barclays Capital, one of the 10 biggest foreign-exchange traders, said in a Bloomberg Television interview. ``The Fed is playing a non-trivial role in driving up energy prices with this very aggressive easing that we saw earlier this year. The balance of risk is still to the upside for euro-dollar.''

The euro will rise to between $1.62 and $1.63 in coming months, Woo predicted.

Futures on the Chicago Board of Trade show 86 percent odds policy makers will keep borrowing costs unchanged at 2 percent at their next meeting on Aug. 5, compared with a 43 percent chance a month ago.

Fannie, Freddie Shares

Fannie Mae fell 14 percent and Freddie Mac slumped 22 percent in New York trading yesterday after former St. Louis Fed President William Poole said the government may need to bail out the two largest buyers of U.S. home loans. Paulson said the regulator for Fannie and Freddie told him they have enough capital.

``Confidence in the U.S. economy remains very weak,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a research note today. ``The appearance of ongoing stress in the financial sector and weak rate sensitive sectors is keeping the U.S. dollar weak against a number of currencies.''

The Reuters/University of Michigan preliminary index of consumer sentiment may have fallen to 55.5 in July, from 56.4 in June, according to the median forecast of economists surveyed by Bloomberg News. The report is due at 10 a.m. in New York. General Electric Co., the world's biggest maker of power-plant turbines, said today second-quarter profit fell 3.9 percent.

Yen Weekly Decline

The yen headed for its ninth weekly loss against the euro, its longest losing streak in more than a year, trading within 0.2 percent of a record low, on speculation the interest-rate differential will widen, decreasing the appeal of yen- denominated assets.

The extra yield two-year German government debt pays over similar maturity Japanese government notes widened to 3.65 percentage points, the most since July 2.

Risks that inflation will accelerate have intensified, European Central Bank President Jean-Claude Trichet told European lawmakers on July 9, following the bank's decision last week to raise borrowing costs a quarter of a percent to 4.25 percent. Japan's benchmark rate of 0.5 percent is the lowest among major economies.

``The yen is chronically weak because of its extremely low rates,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second-largest publicly traded lender. ``Money is likely to flow into the euro from the yen as the rate outlook in Europe is more supportive.''

The yen may fall today to a record low of 170 a euro, he said. UBS AG economists said they now expect the European Central Bank to raise its key interest rate in September, economists led by Stephane Deo wrote in a research note. They previously expected no further increase.

South Korea's won headed for its biggest weekly gain since March 1998 as policy makers pledged to shore up the currency and tame inflation. It rose to as high as 1,004.27 against the dollar, before trading at 1002.70, from 1,002.90 yesterday.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: July 11, 2008 07:27 EDT