Oct. 18 (Bloomberg) -- The dollar may ``plunge'' in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan's former top currency official.

U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today in Tokyo. Sakakibara, 66, was dubbed ``Mr. Yen'' because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance.

``Should growth fall below 1 percent, we could see a plunge in the dollar,'' said Sakakibara, who is currently a professor at Tokyo's Waseda University. ``Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.''

The dollar's 7.3 percent decline against the euro this year and a global credit market slump will be the focus of discussion when Treasury Secretary Henry Paulson hosts policy makers from Group of Seven countries tomorrow in Washington. French Finance Minister Christine Lagarde has called for discussions over whether the European Central Bank should sell the euro to protect exporters' earnings.

Greenspan Bullish

Former Federal Reserve Chairman Alan Greenspan doesn't expect a rapid drop in the dollar should nations sell more U.S. Treasuries, according to people attending a forum in Seoul today. Japan, China and Taiwan sold U.S. government bonds at the fastest pace in at least five years in August.

Greenspan is ``of the opinion that holdings of foreign- exchange reserves tend not to be moved easily,'' said Kim Gyung Rok, chief investment officer of Mirae Asset Investment Management Co. in Seoul, who attended the presentation.

Sakakibara said falling U.S. interest rates will put off foreign investors. The Federal Reserve may follow its Sept. 18 interest rate reduction with a further cut before the end of the year to stem fallout from subprime mortgage defaults, Sakakibara said. It is likely to keep the target for the overnight lending rate between banks on hold at 4.75 percent on Oct. 31, he said.

The dollar fell to $1.4247 against the euro at 8:24 a.m. in London from $1.4208 late yesterday and approached a record low of $1.4283 reached on Oct. 1. It bought 116.50 yen from 116.68. The U.S. currency may fall beyond $1.45 per euro in 2008 and even further depending on the U.S. economy's slowdown, Sakakibara said.

Intervention History

The International Monetary Fund yesterday cut its forecast for 2008 expansion in the world's biggest economy to 1.9 percent from 2.8 percent. ``There are serious risks ahead'' because of the financial market turmoil, Simon Johnson, the IMF's chief economist, said at a press conference in Washington.

Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange. Japan hasn't sold its currency since March 16, 2004, and last bought yen in 1998.

While Paulson has said repeatedly that a strong dollar is in America's interest, he says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market.

The ECB bought euros in November 2000, seeking to boost the currency as it fell below 90 cents, following its launch in the previous year. ECB President Jean-Claude Trichet urged politicians to show ``verbal discipline'' on currencies in an interview with CNBC broadcast on Oct. 15.

The yen may approach 100 against the dollar next year as sentiment worsens for the U.S. currency, Sakakibara said. Japan's currency climbed as high as 111.61 on Aug. 17, the strongest in more than a year.

``There's more risk for the yen to strengthen next year, as the dollar's problems grow,'' Sakakibara said.

To contact the reporter on this story: Stanley White in Tokyo At swhite28@bloomberg.net

Last Updated: October 18, 2007 03:40 EDT