July 16 (Bloomberg) -- The dollar dropped to near a record low against the euro and weakened versus the yen on concern U.S. bank losses and writedowns will increase this week, further eroding confidence in the financial system.

The Dollar Index on ICE futures in New York fell to the lowest level in almost three months before Wells Fargo & Co., Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. report earnings this week that will probably add to the $417 billion of credit losses since last year. Federal Reserve Chairman Ben S. Bernanke yesterday abandoned his June assessment that economic risks had diminished.

``There's no doubt there's further deterioration in the cards for bank earnings and we'll continue to see financial sector woes play themselves out,'' said Peter Frank, a currency strategist in London at Societe Generale SA, France's second-biggest bank by market value. ``Bernanke made it clear the Fed has a fairly pessimistic view on U.S. growth. We've been significant dollar bears and remain so for the rest of the year.''

The U.S. currency dropped to $1.5931 per euro as of 6:33 a.m. in New York, from $1.5911 yesterday, when it slid to a record $1.6038. The dollar fell to 104.07 yen, from 104.73 yen. The euro dropped to 165.54 yen, from 166.65.

The dollar will weaken to $1.6125 per euro this month and trade between $1.60 and $1.63 through September, Frank said.

The Dollar Index, which tracks the currency against those of six U.S. trading partners, fell for a sixth day, dropping 0.4 percent to 71.6, the lowest level since April 23.

European Inflation

The euro was supported after a report showed inflation in Europe accelerated to 4 percent in June, the highest in more than 16 years. The inflation rate in the euro area rose from 3.7 percent in May, the European Union statistics office in Luxembourg said, confirming an estimate published on June 30.

The Australian dollar declined to 97.80 U.S. cents, from 97.93 cents yesterday in New York, after Reserve Bank of Australia Governor Glenn Stevens said slowing demand will ease inflationary pressure. The Aussie, as the currency is known, reached a 25-year high of 98.49 cents yesterday.

The yen strengthened against all 16 major currencies as concern losses at financial services companies will widen prompted investors to reverse carry trades.

The yen rose to 101.75 per Australian dollar from 102.56. It also gained 0.7 percent against the New Zealand dollar to 80.35 and 0.7 percent versus the South African rand to 13.5927.

`Yen Buying'

``Risk aversion is prompting yen-buying,'' said Akira Kato, senior manager of the foreign-exchange trading department in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender by assets. ``Investors are concerned about U.S. government-sponsored enterprises and upcoming earning reports from the U.S.''

The yen may rise to 165.50 per euro today, he said.

In carry trades, investors borrow in countries with low interest rates and invest in high-yielding assets elsewhere. Japan's 0.5 percent target lending rate compares with 4.25 percent for the European Central Bank, 7.25 percent in Australia, 8.25 percent in New Zealand and 12 percent in South Africa.

Wells Fargo, the second-biggest U.S. mortgage lender, reports quarterly earnings today. JPMorgan Chase and Merrill announce results tomorrow, while Citigroup, the biggest U.S. bank, publishes its earnings July 18.

Global banks and securities firms have reported losses of about $417 billion due to rising defaults on mortgages for U.S. homeowners with poor credit, according to data compiled by Bloomberg.

`More Bearish'

In testimony before the Senate Banking Committee yesterday, Bernanke said growth and inflation risks are increasing, dropping his June assessment that the threat of an economic downturn has diminished.

Treasury Secretary Henry Paulson told the panel the government would purchase shares in Freddie Mac and Fannie Mae ``only if necessary'' to restore confidence in the two largest buyers of U.S. mortgages. Bernanke speaks again today before the House Financial Services Committee at 10 a.m. in Washington.

``The market was worried about the focus on declining growth yesterday,'' Emma Lawson, a currency strategist at Merrill Lynch & Co. in London, said in a Bloomberg Television interview. ``But the predominant moves on the dollar are being driven by the concerns of the agencies and the requirement of being rescued and the ongoing issues within financial markets. Therefore the dollar has come under pressure.''

Federal funds futures on the Chicago Board of Trade show a 7 percent chance the Fed will increase its 2 percent target lending rate at its Aug. 5 meeting, compared with 77 percent odds a month ago.

Consumer Prices

The U.S. currency has given up most of the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he had ``no bias'' on future interest- rate moves. The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since slumped 1.2 percent on concern that losses will deepen at Fannie Mae and Freddie Mac, the two largest buyers of U.S. mortgages.

U.S. consumer prices may have risen at an annual rate of 4.5 percent in June, the most since September 2005, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department report is due at 8:30 a.m. in New York.

``Consumer-price data aren't likely to support the dollar,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``It will serve as a reminder that the U.S. faces stagflationary risks, making it difficult to conduct monetary policy.''

Poised to Slide

The dollar may fall to a seven-week low of 103.70 yen, according to technical analysis of its price chart, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

The U.S. currency is poised to slide as the relative strength index, a comparison of the magnitude of gains and losses, shows the dollar is losing momentum, Hashimoto said. The dollar's 14-day relative strength index against the yen, was 37.3 today, down from 46.4 on July 14 and 51.6 a week ago.

The so-called support level of about 103.70 yen represents a 38.2 percent reversal of the dollar's climb to a high of 108.58 reached on June 16 from a low of 95.76 on March 17, based on a series of numbers known as the Fibonacci sequence. Support is a level where buying is expected to outweigh selling.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: July 16, 2008 06:51 EDT