Feb. 15 (Bloomberg) -- The dollar fell against the euro, headed for its biggest weekly loss this year, on speculation the slowdown in the U.S. economy will prompt the Federal Reserve to keep cutting interest rates.

The U.S. currency traded near a one-week low against the euro before a report economists say will show consumer confidence dropped last month. The dollar declined after Fed Chairman Ben S. Bernanke yesterday signaled the central bank may lower interest rates again to avert a recession. The yen weakened after stocks in Asia rallied, boosting demand for higher-yielding assets purchased with loans made in Japan.

``The market has taken on board Bernanke's bleak assessment of the U.S. economy,'' said Jeremy Stretch, senior market strategist in London at Rabobank Groep, the third-biggest Dutch bank. Traders ``have scaled up expectations of rate cuts'' and the currency may fall to $1.48 to the euro today.

The U.S. currency fell for a second day and traded at $1.4685 per euro by 7:18 a.m. in New York, from $1.4643 yesterday. It has lost 1.3 percent this week, the most since the period ended Dec. 28. The dollar was at 107.71 yen, from 107.87. The U.S. dollar index traded on ICE futures in New York, which tracks the currency against six major counterparts, fell to 75.99, the lowest since Feb. 5.

The yen earlier fell against 13 of the most-active currencies, dropping the most against the South African rand and Australian dollar, favorites of the carry trade. It traded at 158.15 versus the euro, from 157.95.

Rand Strengthens

The dollar also fell the most against the South African rand and headed for its first weekly loss this year against the currency of Africa's largest economy. The rand benefits from its interest rate of 11 percent and from rising gold and platinum prices. The dollar dropped to 7.65 versus the rand, from 7.70 yesterday and was down 0.6 percent at 90.73 U.S. cents per Australian dollar.

The U.S. currency declined after Bernanke said yesterday the Fed ``will act in a timely manner as needed to support growth.'' The world's largest economy is ``clearly on the edge'' of a recession, former Fed Chairman Alan Greenspan said in Houston yesterday. The economy is at ``stall speed'' and the odds of a contraction are ``50 percent or better,'' he said.

The Reuters/University of Michigan index of consumer sentiment probably dropped to 76, from January's 78.4 reading, according to economists polled by Bloomberg. Another report today may show international buying of U.S. financial assets slowed in December, according to a Treasury survey.

Rate Bets

Futures on the Chicago Board of Trade show 36 percent odds the central bank will lower its target for overnight lending between banks by 0.75 percentage point to 2.25 percent by March 18, compared with a 30 percent chance yesterday. The remaining odds are for a 0.5 percentage point reduction.

The yen fell after the Bank of Japan voted unanimously today to keep interest rates unchanged at 0.5 percent, as expected by all 42 economists in a Bloomberg News survey. Governor Toshihiko Fukui told reporters after the decision that inflationary risks are low and the global economic outlook is becoming more uncertain.

``We're seeing large swings in global stock and currency markets because of a high aversion to risk,'' Fukui said.

The Japanese currency also declined as stock markets in Asia advanced, boosting demand for higher yielding assets. The Morgan Stanley MSCI Asia Pacific Index rose 0.4 percent today, pushing its gain the last two days to 4.3 percent.

``Things are calming down and people are moving money to higher yielding assets,'' said Michelle Joubert, a trader in London at Currencies Direct Ltd., which manages foreign-exchange transactions for corporate clients and wealthy individuals. ``The carry trade is weighing on the yen'' and the Japanese currency may trade as low as 115 to the dollar in the next three months.

In carry trades, investors buy higher-yielding assets with money borrowed in countries with low interest rates. The strategy is considered risky because currency fluctuations can erase the profit between borrowing and lending rates. Australia's benchmark rate is 7 percent.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Last Updated: February 15, 2008 07:23 EST