June 20 (Bloomberg) -- The dollar posted its biggest weekly decrease against the euro in almost three months on speculation the Federal Reserve will delay increasing borrowing costs to prevent further credit market writedowns.

The greenback fell this week versus all of the other major currencies as Lehman Brothers Holdings Inc. said losses at Fannie Mae and Freddie Mac, the two largest U.S. mortgage finance companies, may mount. The euro posted a sixth weekly advance against the yen, the longest gain in more than a year, as German producer price inflation accelerated.

``The re-emergence of financial concern places a question mark on the Fed's ability to raise interest rates,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``The possibility of a revisit to $1.60 is still in the cards.''

Against the euro, the dollar dropped 0.7 percent to $1.5618 at 4:20 p.m. in New York, from $1.5504 yesterday. It touched $1.6019 on April 22, the weakest level since the 15-nation euro debuted in 1999. The dollar fell 0.7 percent to 107.26 yen, from 108. The euro traded at 167.55 yen, compared with 167.43.

The U.S. currency fell 1.6 percent against the euro this week, its biggest drop since March 28. The dollar rose 2.5 percent last week, the most since 2005, and touched a one-month high of $1.5303 per euro after Fed Chairman Ben S. Bernanke said economic risk had faded.

The dollar decreased 0.9 percent against the yen this week, while the euro increased 0.7 percent versus Japan's currency in the longest winning streak since May 2007.

Mexican Peso

Mexico's peso advanced to a five-year high of 10.2677 per dollar and increased 0.8 percent this week after the central bank raised its benchmark interest rate by a quarter-percentage point to 7.75 percent to control accelerating food and energy prices. Eighteen out of 26 economists surveyed by Bloomberg News predicted the bank would hold rates steady.

The Australian and New Zealand dollars posted weekly increases on speculation the countries will maintain their yield advantages over the U.S. The target lending rates of 7.25 percent in Australia and 8.25 percent in New Zealand compare with the 2 percent fed funds target.

The Aussie was up 0.3 percent to 95.41 U.S. cents today, pushing its weekly gain to 1.6 percent, the biggest in almost three months. The kiwi, as the New Zealand dollar is known, traded at 76.20 U.S. cents and also rose 1.6 percent this week.

Fed Rate Outlook

Futures on the Chicago Board of Trade showed an 8 percent chance the Fed will raise the target rate for overnight lending between banks by a quarter-percentage point on June 25, compared with 22 percent odds a week ago. The odds of an increase in August also fell.

Seventy-six banks bid at the Fed's auction of $75 billion in Term Auction Facility loans on June 16, the most since April 21, when 83 submitted offers.

U.S. regional bank stocks are in ``capitulation mode,'' said Merrill Lynch & Co. in a research note, citing credit market losses, potential dividend cuts and capital raisings. The S&P 500 Regional Banks Index fell to 53.82 yesterday, the lowest since at least 2003.

``It's not an environment where the Fed could raise rates yet,'' said David Powell, currency strategist at Bank of America Corp. in New York. ``It's likely to weigh further on the dollar.''

Fannie Mae and Freddie Mac may post further losses in the second quarter as the housing market continues to deteriorate, Lehman said in a note to clients today.

Crude Oil Rises

Crude oil for July delivery climbed 2 percent to $134.62 a barrel today as the weaker dollar made commodities more attractive as a currency hedge and the New York Times reported that an Israeli military exercise may have been a rehearsal for a potential bombing attack on nuclear targets in Iran. Oil reached a record $139.89 on June 16.

The correlation of the dollar versus the euro and oil prices is minus 0.93 for the past year, indicating they move in the opposite direction 93 percent of the time, according to Bloomberg calculations based on value changes.

The dollar may have difficulty weakening further beyond $1.5640, a 61.8 percent Fibonacci retracement of its rally last week, said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

German producer price inflation accelerated to 6 percent from a year earlier in May, the most since July 2006, the Federal Statistics Office said in Wiesbaden today. European Central Bank President Jean-Claude Trichet said on June 5 that the bank may increase its 4 percent main refinancing rate by a quarter-percentage point next month.

``Commodities remain bid, and the ECB remains hawkish,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``The market is still in a sell-the-dollar-mode.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Jamie McGee in New York at jmcgee8@bloomberg.net.

Last Updated: June 20, 2008 16:24 EDT