Sept. 1 (Bloomberg) -- The dollar fell to a two-week low against the euro before the Institute for Supply Management's manufacturing survey amid concern economic growth may slow.

The U.S. currency slid the most in four weeks yesterday after a regional factory index dropped more than forecast. Record oil prices and destruction from Hurricane Katrina caused traders to pare expectations for Federal Reserve interest-rate increases. A widening rate gap between the Fed and the European Central Bank has driven the dollar up 10 percent this year.

``The U.S. economy has been resilient to rising oil prices and now it may be starting to bite,'' said David Mann, a currency strategist at Standard Chartered Plc in London. ``It is certainly driving the dollar weaker.''

Against the euro, the dollar was at $1.2373 at 10:25 a.m. in London, from $1.2346 late yesterday in New York, and earlier dropped as low as $1.2380, its weakest since Aug. 15, according to electronic foreign-exchange dealing system EBS. The U.S. currency was also at 110.66 yen, from 110.61. Mann said the dollar may fall to $1.29 per euro by the end of the year.

The dollar extended losses against the euro after breaching $1.2350, a level at which traders had placed pre-set orders to sell the currency, according to analysts including Sven Friebe at Credit Suisse Group in Zurich. Traders sometimes place such orders to limit losses in case their bets go the wrong way.

Fed Expectations

The ISM's manufacturing index probably held just above the average rate of the past year, according to the median forecast in a Bloomberg survey. The index rose to 57 in August, the highest this year, from 56.6 in July, according to the estimate. Readings above 50 indicate growth. The release is scheduled for 10 a.m. New York time.

The dollar dropped 1 percent against the euro and 0.6 percent versus the yen yesterday after the National Association of Purchasing Management-Chicago said its gauge of regional manufacturing fell the most on record. The index declined to 49.2 from 63.5 in July, compared with the median forecast of 61.

``Markets are rapidly abandoning the forecast for the Fed to increase rates to 4 percent by year-end, and are instead pricing in 3.75 percent,'' said Kikuko Takeda, a manager of foreign exchange at Bank of Tokyo-Mitsubishi Ltd. in Tokyo. ``People are worrying lofty oil prices and Hurricane Katrina might hurt the U.S. economy when weaker data continue to come out.''

Takeda expects the dollar to trade between 109.50 yen and 111 yen and $1.22 and $1.24 versus the euro today.

ECB Meets

Fed policy makers have raised their benchmark rate 10 times since June 2004, to 3.5 percent. The ECB will keep its key rate unchanged at 2 percent for the 27th straight month today, according to all 36 economists surveyed by Bloomberg. The ECB's announcement is scheduled for 12:45 p.m. London time.

The euro advances against the dollar even after a report showed that European manufacturing growth slowed in August, suggesting the economy may struggle to rebound from a second- quarter slowdown.

December Eurodollar futures contracts yielded 4.08 percent, down from 4.315 percent three days ago, showing traders are cutting expectations for the Fed's target rate by year-end.

The futures settle at a three-month lending rate that has averaged about 22 basis points more than the Fed's overnight target lending rate between banks over the past 10 years.

The dollar may be supported by comments from Anthony Santomero, president of the Federal Reserve Bank of Philadelphia, that the U.S. economy can withstand higher oil prices and the after effects of the hurricane.

Santomero said in a speech to a business group in Philadelphia yesterday that ``it is likely that we can continue'' to raise interest rates ``at what we have described as a measured pace.''

Santomero Comments

``Santomero's comments indicate growth and interest-rate differentials between the U.S. and other regions won't narrow that much,'' said Dariusz Kowalczyk, senior investment strategist in Hong Kong at CFC Securities Ltd. ``He addressed two factors that dragged the dollar lower, so his comments provide some support for the U.S. currency.''

The dollar may trade between 110.50 yen and 111 yen before New York trading, he said.

A report tomorrow from the U.S. labor department may show the economy added jobs above the average of the past two years. Employment rose 190,000 in August after 207,000 jobs were created a month earlier, according to the median estimate of 70 economists surveyed by Bloomberg.

Koizumi Polls

Demand for the yen may be boosted by the latest opinion poll showing a widening margin of support for the ruling Liberal Democratic Party, led by Prime Minister Junichiro Koizumi.

A win in the Sept. 11 elections will give Koizumi the power to push through his mandate to spur the economy. Faster growth has encouraged overseas investors to buy Japanese assets, with the Nikkei 225 Stock Average today reaching a four-year high.

``An increase in support for Koizumi or the LDP is positive for the yen,'' said Tomoko Fujii, a currency strategist in Tokyo at Bank of America Corp. ``A stable administration run by the LDP is important because it would make it easier to promote reforms.''

Bank of America expects the yen to rise to 109 by the end of September and 107 by the end of this year, she said.

The Asahi newspaper poll published today, conducted from Aug. 29 to Aug. 30, showed the LDP had more than twice the support of the opposition Democratic Party of Japan.

To contact the reporter on this story: Kosuke Goto at at kgoto2@bloomberg.net Steve Rothwell at srothwell@bloomberg.net

Last Updated: September 1, 2005 05:26 EDT