Dec. 27 (Bloomberg) -- The dollar is heading for the biggest quarterly decline against the euro in more than two years and may weaken versus the yen on speculation U.S. officials will allow a prolonged slide into 2005, according to a survey by Bloomberg News of 58 traders and strategists from Tokyo to New York.

Almost sixty percent of the participants polled from Dec. 22 to Dec. 24 advised selling the dollar against the euro. The dollar is down 8.1 percent this quarter and fell to a record $1.3555 per euro in Tokyo trading today. Forty-three percent said to sell the dollar versus the yen, up from 39 percent.

Investors are betting the Bush administration won't try to stop the dollar's decline because it will help narrow the U.S. trade deficit from an all-time high, said Matt Cobon, who manages currency risk in London at Deutsche Asset Management. The European Central Bank has offered no sign it's prepared to stem the slide, which has pushed the U.S. currency toward a third consecutive annual drop versus the euro, he said.

``The U.S. has a very benign policy towards the dollar and policy makers recognize there needs to be some adjustment in the currency,'' said Cobon at Deutsche Asset, which oversees $70 billion. ``For the ECB to intervene, you'd have to see the economic situation in Europe worsen considerably from here. They would have to start signaling to people they were also prepared to cut rates and we're not there yet.''

Against the euro, the dollar traded at $1.3529 at 5:51 p.m. in Tokyo, from $1.3528 late in New York on Dec. 24, when it ended the week down 1.7 percent, according to an electronic foreign- exchange trading system EBS. The dollar was also hovered at 103.79 yen, having last week weakened 0.5 percent.

Moves may be exaggerated this week because of public holidays in London today and tomorrow and in Japan on Friday, said Grant Wilson, a trader at Mellon Financial Corp. in Pittsburgh.

Biggest Since Reagan

The dollar has lost 5.2 percent this year as measured by the Federal Reserve's Trade-Weighted Major Currency Dollar Index. It dropped 15.8 and 9.3 percent in the previous two years. The index hasn't retreated for three consecutive years since Ronald Reagan was in the White House.

H.J. Heinz Co. and Deere & Co. are among U.S. companies to benefit from a weaker currency. Heinz, the world's biggest ketchup maker, said the dollar's decline boosted revenue from abroad in its second quarter. Deere said overseas sales of farm machinery jumped in the quarter ended Oct. 31.

Bush's policy of letting markets set exchange rates is unchanged, U.S. Treasury spokesman Rob Nichols said on Dec. 23 in an e-mailed response to a question about the administration's stance, after the dollar dropped to $1.35 per euro. A day earlier, he said the U.S. has ``a strong dollar policy.''

`Unsustainable'

The U.S. needs a weaker dollar to shrink the record deficit in the current account, said Laurence Meyer, a former Federal Reserve Governor, in an interview on Dec. 23. The current account is a measure of trade, services, tourism and investments. The gap widened to $164.7 billion last quarter.

``The current account is unsustainable and the dollar is going to fall,'' said Meyer. ``It's part of an unwinding of global imbalances and on balance is a good development.''

Bush is the only U.S. president who hasn't bought or sold dollars to affect the exchange rate since the end of the Bretton Woods system of fixed exchange rates three decades ago. The ECB hasn't sold the euro since the 12-nation currency made its debut in 1999 and probably isn't yet prepared to do so, said Cobon at Deutsche Asset.

The euro's gain hasn't been ``too troublesome,'' Guy Quaden, who votes on interest rates at the ECB, said in an interview with Belgian magazine Tendances published on Dec. 23. Business confidence in Germany, Europe's largest economy, rose to an eight- month high in December, the Ifo institute said on Dec. 17.

Interest Rates

The dollar's decline may be limited by expectations the Fed will raise its benchmark interest rate next year, said Riz Din, a currency strategist in London at Barclays Capital.

``The U.S. will be tightening more aggressively through 2005, whereas tightening from the ECB is still someway off,'' said Din. Rate differences ``will be in favor of the dollar strengthening,'' he said.

Fed policy makers lifted their target rate for overnight loans between banks by a quarter point to 2.25 percent on Dec. 14, the fifth increase this year, and said they will continue to do so at a ``measured'' pace. The ECB hasn't touched its benchmark rate since a reduction in June last year to 2 percent.

Japan's currency, heading for the third consecutive annual advance against the dollar, may gain on expectations the world's second-largest economy will extend an economic expansion. The yen has appreciated 3.1 percent so far this year and is up 6.1 percent since the start of the fourth quarter.

`Bout of Yen Strength'

Company profits have yet to be hurt by the stronger yen, Bank of Japan policy makers said at their November meeting, according to minutes published on Dec. 22. A government report the same day showed export growth accelerated to 13.4 percent in November from 11.7 percent in October.

``We could have a bout of yen strength in the immediate future,'' said Derek Halpenny, a currency strategist in London at the Bank of Tokyo-Mitsubishi Ltd. ``The fact that the export sector looks to be doing well is a supporting factor.''

International investors bought 9.3 trillion yen ($89.9 billion) in Japanese stocks through Nov. 30, according to the Ministry of Finance, the most since 1999. The Nikkei 225 Stock Average and the Topix index are headed for the first back-to-back annual advances in nine years.

``Amid bearish sentiment for the dollar, the steady performance of the Japanese stock market will probably support buying of the yen,'' said Minoru Shioiri, senior manager of the treasury and foreign exchange division at Mitsubishi Securities Co., a unit of Japan's third-biggest lender.

                      BUY      SELL      HOLD

Euro                   34         9        15
Yen                    25        12        21
British pound          22        14        22
Swiss franc            26        11        21
Australian dollar      28        10        20

Euro versus yen       BUY      SELL      HOLD

                       20        18        15

To contact the reporter on this story: Jake Lee at jlee127@bloomberg.net

Last Updated: December 27, 2004 03:54 EST