Dec. 30 (Bloomberg) -- The dollar declined against the euro and the yen on speculation the Federal Reserve’s zero target lending rate will weigh on demand for the greenback.

The currency also fell as a report showed U.S. consumer confidence dropped this month to a record low, adding to concern the recession is deepening. The euro rose above 98 pence against sterling for the first time, heading closer to parity on bets the Bank of England will keep its main lending rate lower than the European Central Bank’s target.

“With the Fed reverting to non-conventional monetary policy, the whole notion of a strong dollar goes out the window,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second-largest bank. “The risks are skewed to dollar weakness.”

The dollar slid 1 percent to $1.4067 per euro at 4:09 p.m. in New York, from $1.3927 yesterday, when it reached $1.4364, the weakest level since Dec. 18. The dollar may decline to $1.50 this year, Osborne said. The euro gained 0.6 percent to 127.06 yen from 126.26. The dollar dropped 0.4 percent to 90.34 yen from 90.68.

Today’s decline in the dollar versus the euro pared the greenback’s advance this year to 3.3 percent. The European currency has lost 22 percent versus the yen in 2008, while the dollar has depreciated 19 percent.

Ruble’s Gain

Russia’s ruble strengthened against the dollar for the first time in a week, increasing 0.6 percent to 29.4037 after crude oil prices rose yesterday. The ruble fell 0.4 percent to 41.3662 against the euro and traded at 34.7707 versus a currency basket made up of 55 percent dollars and 45 percent euros.

Bank Rossii allowed the ruble to decline more than 1 percent against the basket 12 times since Nov. 11, according to a central bank official who declined to be identified. The ruble dropped 20 percent against the dollar since the beginning of August on a decline in oil prices this year.

Crude oil for February delivery fell 1.8 percent to $39.30 a barrel on the New York Mercantile Exchange today after advancing 6.1 percent yesterday on speculation Israel’s conflict with Hamas may disrupt Mideast oil supply.

The euro rose for a seventh day against the pound, increasing as much as 1.4 percent to 98.03 pence, the highest since the 15-nation euro’s 1999 debut. It’s the longest stretch of gains since early September.

BOE Versus ECB

The Bank of England reduced its main rate by 3.5 percentage points this year to 2 percent to limit the fallout from the global financial crisis. The ECB cut its rate to 2.5 percent, 1.5 percentage points lower than at the start of the year, with some policy makers indicating they may be reluctant to reduce borrowing costs again next month.

Charts used to predict price movements show the euro and the pound may reach parity this week, according to Ashraf Laidi, chief foreign-exchange analyst at CMC Markets Plc in London.

“Euro strength is creeping across the board, hitting a fresh all-time high versus the pound, paving the path for parity as early as this week,” Laidi wrote in a research note yesterday. “One of the several factors making parity possible is remaining technical strength in the euro-dollar.”

The single currency may “retest” its 200-day moving average of about $1.4650, which is a 61.8 percent Fibonacci retracement of the decline from the record high of $1.6037 on July 15 to the Oct. 28 low of $1.2330, Laidi said. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.

Fed’s Rate Cut

The Fed cut its benchmark interest rate this month to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy. The New York- based Conference Board reported today that its index of consumer confidence fell to an all-time low of 38 this month from 44.7 in November. The group started keeping records in 1967.

The dollar may strengthen to the low $1.20s versus the euro and then reverse gains by year-end, possibly weakening to the $1.50s, said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, in an interview on Bloomberg Radio. The Fed’s stimulus and zero interest rate will not be attractive to foreign investors, he said.

“The most rewarding trade out of the gates in 2009 will be to own the dollar,” Franulovich said. “Ultimately, the longer- term prognosis is weakness.”

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

Last Updated: December 30, 2008 16:14 EST