Feb. 18 (Bloomberg) -- The dollar was headed for its biggest weekly loss in two months against the euro in Europe after Federal Reserve Chairman Alan Greenspan declined to signal an acceleration in interest-rate increases.

The U.S. currency is down 2.5 percent from a three-month high of $1.2732 per euro on Feb. 7. Greenspan yesterday told the House Financial Services Committee that U.S. interest rates are still ``fairly low'' after six quarter-point increases since June, repeating remarks he made to a Senate panel on Feb. 16.

``You needed to get Greenspan to suggest that the pace of tightening would be greater than what's already priced in'' for the dollar to continue its appreciation, said Harvinder Kalirai, chief market analyst in Sydney at State Street Corp., which manages more than $1.2 trillion of assets as the world's largest custodian. ``He didn't do that.''

Against the euro, the dollar traded at $1.3069 at 5:40 a.m. in London, from $1.3070 late yesterday in New York, according to electronic currency-dealing system EBS. The dollar is down 1.6 percent since Feb. 11, headed for the biggest weekly drop since the seven days ended Dec. 24. It traded at 105.48 yen from 105.50.

The U.S. currency has gained 3.7 percent versus the euro so far this year, and 2.8 percent against the yen. It was headed for its first losing week in five versus the yen, even after a government report on Feb. 16 showed Japan's economy entered a recession for the fourth time since 1991.

``We'll see the dollar resume a primary bear trend,'' State Street's Kalirai said. The dollar lost 34 percent against the euro and 22 percent versus the yen over the three years to Dec. 31. It fell to a record $1.3666 per euro on Dec. 31.

`Aggressive Bearish'

Fed policy makers have raised their target rate for overnight loans between banks to 2.5 percent, a half-point higher than the European Central Bank's benchmark rate. The Bank of Japan yesterday kept rates near zero.

The yield advantage offered by U.S. Treasuries relative to European debt still isn't sufficient to spur further gains in the dollar, said Claudio Piron, a currency strategist at JPMorgan Chase & Co. in Singapore.

``We still have an aggressive bearish dollar view,'' said Piron. ``We still have some way to go before the yield advantage to the dollar really helps.'' The bank expects the dollar to drop to $1.38 per euro and fall below 100 yen this quarter, he said.

The spread between 10-year Treasury notes and German bunds with a similar maturity was 61.2 basis points today, down from 67.9 basis points on Jan. 10. In September, there was no advantage. Over the past two years, the gap averaged 9.4 basis points. A basis point is 0.01 percentage point.

Japanese Economy

Versus the euro, the yen is down 1.3 percent so far this week after a drop of 1.6 percent last week. Japan's currency yesterday weakened as far as 138.05 per euro, the lowest since Jan. 7, before trading at 137.86 in Tokyo.

``The yen's under increasing pressure,'' said Hideaki Inoue, a foreign-exchange manager in Tokyo at Mitsubishi Trust & Banking Corp., a unit of Japan's second-largest lender. ``There's been a view building that recovery is faltering.'' The yen may drop beyond 106 per dollar today, he said.

Japan's economy shrank at an annual 0.5 percent rate in the fourth quarter. The contraction in the final three months of last year was the third straight quarterly decline in gross domestic product. The median forecast of economists surveyed by Bloomberg was for a 0.7 percent annual growth rate for the fourth quarter.

Hiroshi Watanabe, vice finance minister for international affairs, told reporters yesterday in Tokyo that investors are over- estimating the value of the yen.

`Very Cautious'

Japan may sell yen for the first time since March to curb any advance in the yen, said strategists at UBS AG, the world's largest currency trader, and the Bank of Tokyo-Mitsubishi Ltd.

``The fact that the data has been softer means officials will be very cautious of yen appreciation,'' said Daniel Katzive, a strategist at UBS in Stamford, Connecticut. ``Watanabe's comments are consistent with previous comments from the Ministry of Finance saying they'll be cautious of yen appreciation.''

Some investors may also sell the dollar on concern the record current-account deficit won't narrow significantly, said Piron at JPMorgan. The shortfall was $164.7 billion in the third quarter, the most ever.

The U.S. economy needs to attract about $1.8 billion daily to fund the shortfall and support the dollar's value, according to Bloomberg calculations. The current account is a measure of trade, services, tourism and some investments.

To contact the reporter on this story: Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

Last Updated: February 18, 2005 00:40 EST