Aug. 15 (Bloomberg) -- The dollar dropped the most in about two weeks against the euro and yen after a government report on wholesale prices boosted speculation that the Federal Reserve is finished with its two-year cycle of interest-rate increases.

The British pound, Swiss franc and New Zealand dollar also strengthened versus the U.S. currency after the report showed prices paid to U.S. producers excluding food and energy unexpectedly fell last month.

``If the Fed is in pausing mode and the market anticipates tightening in Europe, we'll look to sell the dollar,'' said Matthew Lifson, chief currency trader at PNC Capital Markets in Pittsburgh.

The dollar fell to 116.09 yen at 5:11 p.m. in New York, from 116.71 yesterday, the biggest drop since July 28. It declined to $1.2785 per euro, from $1.2715, the biggest since Aug. 4.

The U.S. currency is down about 7.3 percent against the euro and 1.4 percent versus the yen this year on expectations central banks in Japan and Europe will outpace the Fed in lifting rates.

The Fed decided to keep borrowing costs at 5.25 percent last week after 17 consecutive rate increases since June 2004 as policy makers rely on slower growth to curb inflation. The U.S. central bank said prices will ``moderate over time'' as the cumulative effect of prior rate increases, surging energy prices and a sagging housing market slow the economy.

The 0.1 percent increase in producer prices followed a 0.5 percent rise in June, the Labor Department said. The core rate, which excludes food and energy, unexpectedly dropped 0.3 percent, the first decline since October.

Foreign Purchases

Futures show the odds of the Fed lifting rates a quarter- percentage point from 5.25 percent at its meeting on Sept. 20 at 33 percent, down from 38 percent odds before the report.

``It lowered expectations for the Fed's September meeting and maybe subsequent ones,'' said Tim Mazanec, senior foreign exchange strategist at Boston-based Investors Bank & Trust Co. ``Sentiment is so negative on the dollar, that's not going to change this year. It's going to remain under pressure.''

The dollar may fall to $1.26 per euro and 115 yen in three months, Mazanec said.

A separate government report showed international investors in June unexpectedly increased purchases of U.S. financial assets.

Foreign net holdings of Treasury notes, corporate bonds, stocks and other financial assets increased $75.1 billion, up from May's revised $63.6 billion, the Treasury Department reported today in Washington.

`Focus of the Day'

Analysts expected inflows of $65 billion, the median of 19 forecasts in a Bloomberg News survey. International purchases of U.S. securities peaked at $102.6 billion in October and averaged $74.7 billion in the 12 months through June.

``Even though we had a better-than-expected number, there was not much reaction'' said Samarjit Shankar, director of global strategy for the foreign exchange group at Mellon Financial Corp. in Boston. ``The producer prices report was the focus of the day.''

The investments were more than enough to cover June's $64.8 billion trade deficit, which some analysts say is an indicator of how easily the U.S. can pay for its record current account and trade shortfalls.

Foreign investors need to exchange their currencies for dollars to buy the securities. Their purchases last year helped the U.S. currency gain 14 percent against the euro and yen.

Confidence among homebuilders fell to the lowest in more than 15 years in August and manufacturing in New York state expanded at a slower pace in August as companies pared inventories, two reports showed today.

The National Association of Home Builders/Wells Fargo index of builder confidence dropped to 32, the lowest since February 1991. Separately, The Fed Bank of New York's general economic index dropped to 10.3, the lowest since June 2005, from 16.6 in July.

To contact the reporter on this story: Deborah Finestone in New York at dfinestone@bloomberg.net; Min Zeng in New York at mzeng2@bloomberg.net.

Last Updated: August 15, 2006 17:13 EDT