By Ron Harui Dec. 23 (Bloomberg) -- The dollar weakened for a second day against the euro before a government report that economists estimate will show sales of new U.S. homes declined to the lowest level in more than 17 years. The U.S. currency headed for its first monthly loss since June versus the euro after the Federal Reserve cut interest rates to as low as zero to help steer the economy out of recession. Japan’s currency is poised for its largest annual gain in more than two decades as $1 trillion of credit-market losses prompted investors to reduce holdings of higher-yielding assets funded with yen loans. “The U.S. dollar is going to go through a period of weakness over the next few months or so,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia Ltd., the country’s biggest mortgage lender. “The economy is very weak and it might go into a period of deflation.” The dollar declined to $1.3983 per euro at 2:56 p.m. in Tokyo from $1.3944 late in New York yesterday. It slid to $1.4719 on Dec. 18, the weakest level since Sept. 25. The yen was quoted at 126.26 per euro following a 1.3 percent decline yesterday. It traded at 90.30 per dollar after falling 1 percent. The Japanese currency reached a 13-year high of 87.14 on Dec. 17. The greenback was little changed at $1.4810 versus the British pound and at 1.0933 against the Swiss franc. Commonwealth Bank now predicts the U.S. currency will fall to $1.4200 per euro by March 31, compared with its previous forecast of $1.1800. Currency trading may be more subdued than usual today because of a public holiday in Japan, Capurso said. Against the yen, South Korea’s won weakened 2.1 percent to 14.81671 and Singapore’s dollar fell 0.2 percent to 62.25 from late in New York yesterday. The MSCI Asia-Pacific Index of regional shares declined 1.1 percent. Russia’s Central Bank Russia’s ruble traded at 28.3648 against the dollar from 28.4763 yesterday. It earlier reached 28.5140, the lowest level since January 2006, after a central bank official, who declined to be identified, said yesterday Bank Rossii allowed the currency to decline for the second time in three days. The currency has slid 17 percent since the start of August. New-home sales in the U.S. dropped to an annual pace of 415,000 in November, the lowest level since January 1991, from 433,000 in October, according to a Bloomberg News survey of economists. The Commerce Department releases the data at 10 a.m. in Washington. Home resales fell 1 percent from the previous month to an annual pace of 4.93 million in November, a separate Bloomberg survey shows. The National Association of Realtors issues the report at 10 a.m. Dollar’s Downtrend “We remain of the view that the dollar is in a multi-year downtrend,” analysts led by Callum Henderson, head of global currency strategy at Standard Chartered Plc in Singapore, wrote in a research note yesterday. “It is clear that policy in the U.S. will continue to be ultra aggressive.” The Fed cut the target overnight lending rate to between zero and 0.25 percent from 1 percent on Dec. 16, and said it is likely to keep rates low for “some time” while considering the potential benefits of buying longer-term Treasury securities. Standard Chartered, the U.K. bank that makes most of its profit in Asia, forecasts the dollar will weaken to $1.50 per euro and 75 yen by the end of March. For the year, the dollar strengthened 4.4 percent against the euro, 34 percent versus the British pound and 28 percent against the Australian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit. Bullish on Yen The yen may extend this year’s 24 percent advance against the dollar, its best annual performance since 1987, on concern a deepening U.S. recession will convince investors to avoid buying higher-yielding assets. Japan’s benchmark interest rate is 0.1 percent, compared with 4.25 percent in Australia and 5 percent in New Zealand. “Japan is not in the mood to invest offshore and we don’t blame them,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “We’re bullish on the yen in the short term.” The yen may strengthen to 85 against the dollar in a month, Callow forecast. A stronger yen contributed to a record 27 percent drop in Japan’s exports in November from a year earlier, a Finance Ministry report showed yesterday. Toyota Motor Corp., the world’s second-largest automaker, yesterday forecast its first operating loss in 71 years because of plunging sales and a surging yen. ‘Creates a Problem’ “Dollar-yen around 90 really creates a problem with regards to Japan’s export market,” said Sharada Selvanathan, a currency strategist at BNP Paribas SA in Hong Kong, in an interview with Bloomberg Television. “I don’t think the Japanese officials are going to be very happy with the level of dollar-yen.” Bank of Japan Governor Masaaki Shirakawa said yesterday that a strong yen will have a negative effect on economic growth in the short term, and added that foreign-exchange rates are one important factor influencing the economy. Finance Minister Shoichi Nakagawa last week signaled Japan is ready to intervene in the currency market for the first time in four years. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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