BEIJING, April 23 -- The U.S. dollar has dropped to a 27-month low against the euro as signs of slowing inflation and growth lessen the currency's appeal.

    The United States currency also tumbled to its weakest level against the British pound in 26 years as investors bet the Federal Reserve will cut borrowing costs later this year while the European Central Bank and Bank of England raise rates. The dollar dropped last week against 14 of the 16 most actively traded currencies tracked by Bloomberg News.

    "It's interest rate differentials that are carrying the day against the dollar," said Paresh Upadhyaya, who helps manage US$29 billion in currency assets in Boston at Putnam Investments. "The downward trend in the dollar remains in place" as concern on slowing growth weighs in.

    The dollar fell 0.46 percent to 1.3590 U.S. dollars per euro last week and 0.82 percent to 2.0026 dollars per pound. The US currency also declined 0.49 percent to 118.68 yen over the period.

    The dollar touched 1.3638 dollars per euro on Friday, the lowest since December 31, 2004. The all-time low, 1.3666 dollars, was recorded on December 30, 2004.

    "The dollar is fairly fragile right now," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. "The market is getting more conviction that the ECB will continue to raise rates. It is only a matter of time for the euro to test the all-time high."

    Bennenbroek said the euro may test the record this week, and the currency may rise to 1.3750 dollars to 1.38 dollars within three months.

    The dollar's losses last week accelerated after a U.S. government report showed that consumer prices excluding energy and food moderated last month. That contrasted with reports from the United Kingdom and New Zealand indicating accelerating price pressure.

    Core consumer prices in the U.S., excluding energy and food, rose 0.1 percent last month after a 0.2 percent increase in February, the U.S. Labor Department reported last week. Core prices rose 2.5 percent from a year earlier, compared with a 2.7 percent increase in February.

    Separate U.S. economic reports last week showed declining industrial production and weakness in the labor market.

    Slower inflation and growth prompted interest-rate futures traders to raise bets the Fed will reduce its target rate for overnight lending between banks. The odds of a quarter-percentage point cut to five percent by its August 7 meeting rose to 25 percent on Friday from 20 percent at the beginning of the week.

    The Fed's benchmark interest rate has been 5.25 percent since June 29. The Frankfurt-based ECB increased its key rate to 3.75 percent last month, the seventh boost since late 2005, and left the door open for a further increase. The BOE's benchmark rate is 5.25 percent.

    The yield advantage of 10-year Treasury notes over similar-maturity German bunds dropped to 0.47 percentage point last week, the lowest since November 2004. A narrowing yield gap dims the allure of dollar-denominated assets.

    The economy in the euro zone will grow 2.3 percent this year, beating the 2.2 percent estimate for the U.S., the International Monetary Fund said in its semiannual World Economic Outlook released April 11 in Washington.

    The euro also reached a record high against the yen last week on speculation the ECB will lift its borrowing costs faster than the Bank of Japan this year.

    ECB council member Axel Weber told Handelsblatt newspaper that an "extremely positive" economic outlook meant the bank can't signal it's finished raising rates.

    (Source: Shanghai Daily)