Aug. 24 (Bloomberg) -- The dollar headed for a weekly decline against the euro before a government report that's forecast to show sales of new homes in the U.S. dropped in July to the lowest in seven years.

The U.S. dollar has fallen against 13 of the 16 most-active currencies this week as the chief executive of the biggest U.S. mortgage lender said the economy is heading for recession and Goldman Sachs Group Inc. lowered its forecast. The yen was set for a losing week as the largest weekly gain in Japanese shares since October 2002 spurred investors to borrow the currency to buy higher-yielding assets.

``There's a bias to sell the dollar,'' said Yuji Saito, head of the foreign exchange sales department at Societe Generale SA in Tokyo. ``The housing and subprime woes are likely to act as a drag on the economy and worsen consumer sentiment.''

The U.S. currency fell to $1.3570 per euro at 12:17 p.m. in Tokyo from $1.3475 a week ago. It traded at 116.37 yen from 114.36 yen a week earlier. It may slide to $1.3600 per euro and 115.00 yen today, Saito said.

Countrywide Financial Corp. Chief Executive Angelo Mozilo, speaking on the CNBC television network yesterday, said recent losses in credit markets were ``one of the greatest panics.''

``Comments from Countrywide show concerns about credit markets and subprime loans won't disappear any time soon,'' said Takeshi Tokita, vice president of foreign exchange sales at Mizuho Corporate Bank in Tokyo. ``Housing data are likely to be weak and this will be a reason to sell the dollar'' to 115.50 yen and $1.3580 against the euro today.

Undermine the Dollar

Purchases of new homes may have fallen to an annual rate of 820,000 units, a 1.7 percent decline from June and the slowest pace since 2000, according to the median forecast in a Bloomberg News survey of 72 economists. The Commerce Department will report the figures at 10 a.m. New York time.

``The housing numbers in the U.S. will probably remain weak for some time,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``This will be a factor that will tend to undermine the U.S. dollar and bring rate cuts.''

Goldman, in a note by New York-based analyst Jens Nordvig yesterday, raised its forecast for the euro against the dollar, saying it will rise to $1.43 within three to six months as housing weakness slows the world's largest economy. The previous forecast was $1.35. The firm said the dollar will fall to 110 yen, from a previous forecast of 118.

Revived Interest

The yen may extend losses on speculation the rebound in Asian stocks this week will restore investor confidence to send money overseas in search of higher returns.

Japan's currency headed for the biggest weekly loss in more than eight years as investors sold the yen and bought New Zealand's dollar because its interest rate is 7.75 percentage points higher than Japan's. The difference in yield between benchmark two-year New Zealand and Japanese bonds widened to 6.56 percentage points today, the largest in almost a week.

``Some individual investors are selling the yen,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``They've revived their interest in buying higher-yielding currencies such as the New Zealand dollar.''

The yen traded at 83.32 against New Zealand's dollar from 79.74 a week ago. The 4.5 percent advance was the most since March 1999. The yen may fall to 116.70 against the dollar and 158.20 per euro today, Muta said.

Japan's Nikkei 225 Stock Average gained 6.5 percent this week, the most since October 2002, and the Morgan Stanley Capital International Asia-Pacific Index of regional shares climbed 7.6 percent, the most since March 2002.

The Bank of Japan kept its benchmark interest rate at 0.5 percent yesterday, the lowest in the industrialized world, spurring the biggest two-day drop in the yen versus the euro since 2004.

Volatility on one-month dollar-yen options fell to 12.30 percent today from 15.50 percent last week. Lower volatility may encourage carry trades as it implies the bets will be exposed to lesser exchange-rate fluctuations.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at Swhite28@bloomberg.net

Last Updated: August 23, 2007 23:19 EDT