Nov. 27 (Bloomberg) -- The dollar fell for a fifth day against the euro, the longest losing streak in seven months, on speculation the Federal Reserve will reduce interest rates in the first quarter.

The U.S. currency slumped to the weakest since March 2005 against the euro before Fed Chairman Ben S. Bernanke speaks tomorrow on the U.S. economy. Traders raised bets the Fed will cut borrowing costs as reports this week may show a worsening housing market. The yen dropped to a record low versus the euro as investors favored higher-yielding European assets.

``Bernanke will acknowledge the economy is underperforming the Fed's expectations,'' said Harvinder Kalirai, head of research in Sydney at State Street Corp., which serves as a custodian for $10.7 trillion of assets. ``Easier monetary policy is in store some time earlier next year so this break lower in the dollar is likely to continue.''

The dollar slid to $1.3120 per euro at 2:50 p.m. in Tokyo compared with $1.3094 in New York Nov. 24. The U.S. currency also traded at 115.93 yen from 115.90, after touching 115.40, the weakest since Aug. 21. The dollar will fall to $1.35 per euro and 112 yen in the next six weeks, Kalirai said.

The U.S. currency has declined 2.5 percent in the past five days, the most since a 2.55 percent drop in the week to Jan. 6.

Investors see a 51 percent chance the Fed will lower its benchmark 5.25 percent rate at a March 21 meeting, compared with 40 percent a week earlier, according to interest-rate futures.

By contrast, futures show investors are betting the European Central Bank will lift its 3.25 percent rate twice more by June and the Bank of Japan will boost key borrowing costs three times to 1 percent by the end of next year, still the lowest rates among the world's major economies.

Limit to Yen

The dollar reversed losses against the yen as Japanese investors said they will keep putting money into the U.S. to take advantage of the higher yields.

``There's a limit to yen strength,'' said Yuuki Sakurai, who helps manage $5.9 billion in non-Japanese securities at Fukoku Mutual Life Insurance Co. in Tokyo. ``People know the global economy is not going to boom, that means they want to invest in long-term bonds. It's mostly U.S. Treasuries.''

The dollar may rise as high as 118 yen by the end of March, Sakurai said.

Trend to Continue

The euro, the second-most held currency in foreign reserves according to the International Monetary Fund, surged to a record against the yen on speculation central banks may buy it as they sell dollars, said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney.

``I see further euro-yen appreciation'' said Grace. ``This trend is likely to continue as the ECB raises rates.''

The euro reached an all-time high of 152.43 yen before trading at 152.36 from 151.71 on Nov. 24. It will climb to 165 yen in 12 months, Grace forecast.

Seventy-two percent of 36 strategists and investors surveyed by Bloomberg on Nov. 24 advised buying the euro against the dollar, the most since September. Fifty-nine percent recommended purchasing the euro versus the yen.

The dollar's drop boosted the price of gold for a seventh day as investors switched into alternative assets. Shares of exporters in Asia such as Toyota Motor Corp. and Samsung Electronics Co. fell as a weaker dollar erodes the local currency value of their export earnings.

The dollar has fallen 9.8 percent against the euro this year, almost erasing its gains through 2005, sliding by more than most strategists forecast at the start of the year. The median estimate of 53 strategists surveyed by Bloomberg News in January was for the dollar to drop to $1.26 per euro by year-end amid speculation a record U.S. trade deficit would weaken it.

Consumer Spending

Losses in the dollar were limited by speculation consumer spending will support growth in the world's largest economy. U.S. shoppers spent 18.9 percent more over the Thanksgiving holiday weekend than last year, the National Retail Federation said in a statement yesterday. The Conference Board on Nov. 28 will probably report that its index of consumer optimism rose to 106 this month from 105.4, according to a Bloomberg News survey of economists.

``I'm expecting consumer confidence to come out quite strong'' and help the dollar strengthen to $1.30 to the euro by year-end, said Matthew Jones, a senior currency dealer in Sydney at Custom House Global Foreign Exchange.

Caught Napping

Before Bernanke's speech, the National Association of Realtors' will release a report tomorrow showing purchases of previously owned homes dropped 0.5 percent last month to an annual rate of 6.15 million, the weakest since January 2004, according to the median estimate in a Bloomberg survey.

New-home sales probably also fell, a report from the Commerce Department a day later will show, according to the survey.

U.S. gross domestic product will rise 2.9 percent next year, slower than the 3.6 percent forecast in June, George W. Bush's Council of Economic Advisers said Nov. 21.

``This dollar sell-off still has more to go,'' said Thio Chin Loo, senior currency strategist at BNP Paribas SA in Singapore. ``The market is warming to the view that the Fed may cut rates. The interest-rate story is slowly but surely taking the shine off the dollar.''

The dollar's decline accelerated in below-average trading during U.S. and Japanese public holidays late last week and as pre-set orders to sell the currency were triggered, said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney.

The dollar's decline ``caught a lot of the market napping,'' said Gibbs. ``A lot of people are not positioned as they would like to be.'' It may drop to $1.35 per euro in coming weeks, he said.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net;

Last Updated: November 27, 2006 00:52 EST