Dollar Weakens Versus Euro on Speculation Fed to Hold Rates

London - The dollar fell for the first time in three days against the euro on speculation the Federal Reserve will hold interest rates near zero to support growth in the world’s largest economy.

The greenback also weakened against the Norwegian krone and the Swedish krona on prospects Fed Chairman Ben S. Bernanke will tell Congress in testimony starting today that last week’s increase in the discount rate isn’t a prelude to higher benchmark borrowing costs. The New Zealand dollar and the Australian dollar slipped as falling stock markets reduced demand for higher-yielding currencies.

“We expect the Fed to provide some comfort to investors that they are not going to unwind the monetary stimulus too rapidly,” said Ian Stannard, a currency strategy at BNP Paribas SA in London. “Although the economic situation has improved, there’re still signs that the recovery might not be going at the pace that some in the market have priced in.”

The dollar weakened to $1.3543 per euro as of 7:15 a.m. in New York from $1.3507 yesterday, when it jumped 0.7 percent. The U.S. currency has risen 3 percent versus the euro since Jan. 31, heading for a third monthly gain, its longest stretch since November 2008.

The yen strengthened to 90.05 per dollar from 90.22, after reaching 89.92 yesterday, the highest since Feb. 16. Japan’s currency slipped to 121.97 per euro, from 121.86. The Norwegian krone appreciated to 5.9379 per dollar from 5.9572. The Swedish krona strengthened to 7.2311 per dollar from 7.2656. The MSCI World Index of shares fell 0.3 percent.

Semiannual Report

Bernanke is set to deliver his semiannual report on the economy today and tomorrow a week after the Fed decided to raise the discount rate charged to banks for direct loans.

The Fed said Feb. 18 it was increasing the rate to 0.75 percent from 0.5 percent to encourage financial institutions to rely less on the central bank for short-term borrowing. It also reiterated that economic conditions are likely to warrant “exceptionally low” benchmark rates “for an extended period.”

Fed Bank of St. Louis President James Bullard said in Richmond, Virginia that the central bank may hold off on raising interest rates through 2010.

Interest-rate futures on the Chicago Board of Trade yesterday showed a 55 percent chance U.S. policy makers would raise the target lending rate by at least a quarter-percentage point to 0.5 percent by November. That was down from 56 percent a day ago.

World Not ‘Happy’

The New Zealand dollar fell 0.3 percent to 69.01 U.S. cents and the Australian dollar dropped 0.2 percent to 88.89 U.S. cents.

“When the world’s happy investors buy the higher yielders, and when it’s not the Aussie and the kiwi tend to be at the top of the losers board,” said Neil Mellor, a currency strategist in London at BNY Mellon Corp. “Monetary-policy issues have gone by the wayside to some degree.”

The U.S. currency may fall to as low as 87 yen next month as investors reduce bets that the Fed will raise its benchmark interest rate, according to JPMorgan Chase & Co.

The dollar’s drop to the weakest level since Dec. 2 versus the yen will come as the U.S. economic recovery moderates and the central bank keeps borrowing costs on hold this year, JPMorgan estimates.

‘Weakening Trend’

“The dollar’s weakening trend against a wide range of currencies will come back,” said Tohru Sasaki, the Tokyo-based chief currency strategist at JPMorgan. “Investors’ expectations of a Fed rate hike are still excessive.”

The South Korean won slid after the country’s central bank said its consumer sentiment index fell to 111 in February, the first drop in four months. A figure exceeding 100 indicates optimists outnumber pessimists.

Foreign investors sold more Korean shares than they bought for the first time in seven days as the Kospi index of shares dropped 1 percent.

“Risk aversion will probably last for some time, at least this week,” said Tae-Shin Park, a bond and currency trader at Societe Generale SA in Seoul.

The won weakened to 1153.25 per dollar, from 1148.3.