June 18 (Bloomberg) -- The dollar fell for a third day against the euro before a U.S. report that may show the Philadelphia region’s manufacturing shrank for a ninth month, adding to signs the Federal Reserve will keep interest rates low.

The euro gained for a second day versus the pound on speculation European Central Bank officials speaking tomorrow will signal they intend to refrain from cutting borrowing costs. The dollar declined as traders cut bets the Fed will raise its benchmark rate this year to a 45 percent chance from 64 percent odds a week ago. The yen fell against the Australian dollar after a report showed Japanese investors bought more overseas bonds then they sold for a sixth week.

“Recent data have convinced market participants the Fed is unlikely to start raising rates anytime soon,” said Danica Hampton, a currency strategist in Wellington at Bank of New Zealand Ltd., the nation’s third-largest bank. “As a result, the dollar is under downward pressure.”

The dollar fell to $1.3961 per euro as of 7:32 a.m. in London from $1.3942 in New York yesterday. The U.S. currency traded at 95.83 yen from 95.75 yen when it fell to 95.52, the lowest level since June 3. The euro rose to 85.15 British pence from 85.04 pence, and advanced to 133.77 yen from 133.50.

The yen dropped to 76.31 per Australian dollar from 76.06 yesterday, and declined to 60.79 versus New Zealand’s currency from 60.68.

Japan’s currency fell after the Ministry of Finance report showed Japanese investors purchased 550.2 billion yen ($5.7 billion) more foreign bonds and notes than they sold during the week ended June 13.

Fed Officials

The greenback weakened after a person familiar with the matter said Fed officials are considering using next week’s policy statement to suppress any speculation they are prepared to increase interest rates. Fed staff examined the Bank of Canada’s public intention of forgoing an increase until 2010, the person said.

The Fed Bank of Philadelphia’s general economic index was minus 17 this month compared with minus 22.6 in May, according to a Bloomberg News survey of economists. Negative numbers signal contraction.

The benchmark interest rate is as low as zero percent in the U.S., compared with 3 percent in Australia and 2.5 percent in New Zealand, encouraging demand for so-called carry trades. In carry trades, investors get funds in a nation with low borrowing costs and buy assets in one with higher interest rates.

Funding Currency

“Hedge funds use the U.S. dollar as a main funding currency for investing in higher-yielding assets,” Callum Henderson, global head of currency strategy at Standard Chartered Bank in Singapore, wrote in a research note today. “We expect this to continue, barring occasional periods of correction, well into 2011 in a similar pattern to 2002-2004.”

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, was little changed at 80.242.

The euro advanced against 12 of the 16 major currencies on speculation ECB officials speaking tomorrow will signal they plan to keep interest rates on hold, maintaining the allure of assets in the 16-nation region.

“For now the ECB will probably leave rates unchanged, given that the recession is likely bottoming out,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “It’s supportive of the euro.

Borrowing Costs

ECB Governing Council member Michael Bonello said yesterday policy makers haven’t discussed cutting borrowing costs further. Fellow members including Mario Draghi and Lorenzo Bini Smaghi speak tomorrow.

The ECB kept its benchmark rate at a record low of 1 percent on June 4. President Jean-Claude Trichet said the bank hadn’t decided it was the lowest rates could go. The ECB has announced plans to lend banks as much money as they need for up to 12 months and said it will start buying 60 billion euros ($83 billion) of covered bonds in July to counter the recession.

South Korea’s won fell toward a three-week low versus the dollar on concern higher oil prices will boost the nation’s import bill.

The won also declined as overseas investors sold more local shares than they bought for a fourth day, the longest run of net sales in three months. It strengthened 9.5 percent this quarter, the second-biggest gain among Asia’s 10 most-traded currencies, as signs the global recession is easing bolstered demand for emerging-market assets.

‘‘The stock market is going through a period of consolidation and a hike in oil prices is boosting bills for local refiners, contributing to the won’s weakness,” said Sam Hong, a currency dealer with Shinhan Bank in Seoul.

South Korea’s won declined 0.5 percent to 1,265.25 per dollar. It slid to 1,271.92 on June 16, the weakest since May 28.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: June 18, 2009 02:41 EDT