April 25 (Bloomberg) -- The dollar headed for its biggest weekly gain in a month against the euro as traders raised bets the Federal Reserve will stop cutting interest rates.

The euro fell to its lowest level in three weeks after a European Central Bank report showed money-supply growth slowed more than economists forecast last month. The odds of the Fed keeping its target rate for overnight loans between banks on hold this month increased to 26 percent, from 2 percent a week ago, futures trading shows. The Australian dollar declined as lower commodity prices dimmed the outlook for growth.

``The Fed may be done cutting rates after next week, and that's put a floor under the dollar,'' said Jeremy Stretch, senior market strategist at Rabobank International, the third- largest Dutch bank. ``There's also a realization the economic momentum in the euro area is waning.'' The dollar may rise to $1.5550 in the next week, Stretch predicted.

The dollar traded at $1.5601 per euro by 7 a.m. in New York, from $1.5682 yesterday, and $1.5817 on April 18. It has gained 1.4 percent this week. The U.S. currency was at 104.38 yen, from 104.26 yen and 103.26 yen a week ago. Japan's currency rose to 162.83 per euro, from 163.45 yesterday.

The yen advanced against the euro after a government report showed Japan's core consumer prices increased 1.2 percent in March from a year earlier, the most in a decade. Japan's five- year notes had their biggest slump in almost nine years as traders speculated the Bank of Japan will lift interest rates this year.

The Australian dollar fell to 93.29 U.S. cents from 93.97 cents, pushing its two-day drop to almost 2 percent. The New Zealand dollar declined 0.7 percent to 78.24 U.S. cents.

Commodities Weaken

The currencies weakened as the stronger dollar eroded demand for precious metals used to hedge against losses in the U.S. currency. Gold for immediate delivery headed for a weekly drop of 4 percent and was at $880.02 an ounce.

Euro-area M3 money supply, used by the ECB as a gauge of future inflation, grew an annual 10.3 percent, compared with 11.3 percent in February, the Frankfurt-based central bank said today. Economists predicted 10.6 percent, according to a Bloomberg News survey. Slowing money-supply growth may give the ECB room to cut interest rates, eroding the appeal of euro-denominated assets.

``We expect rates on hold until December, when the growth outlook should have deteriorated sufficiently to prompt the first cut,'' Marco Valli, an economist in Milan at UniCredit MIB, the largest Italian bank, wrote in a client note today.

Currency Swings

The dollar may extend its advance against the yen as volatility measures weakened, suggesting increased appetite for risk, Citigroup Global Markets Inc. analysts led by Tom Fitzpatrick wrote in a research note yesterday.

Implied volatility on dollar-yen options expiring in one month with a strike price near current levels fell to 12.4 percent today from 24 percent on March 17, the highest since January 1999. Traders quote the gauge of expectations for future price swings as part of pricing options.

``The largely straight-line rally in dollar-yen from March 17 came concurrent with the broader stabilization in risk appetite,'' according to the research note. ``This could open the door to additional short-term yen depreciation.''

The dollar may rise to 108.62 yen provided it breaks above 104.95 yen, the report said. First resistance at 104.95 yen is near the dollar's Jan. 23 low, and second resistance at 108.62 yen is the currency's Feb. 14 low. Resistance is a level where sell orders may be clustered.

Dollar Index

The Dollar Index traded on ICE futures in New York, which tracks the U.S. currency against those of six trading partners, rose to 73.03 today, the highest in a month. It has gained from a record low of 70.698 on March 17.

The dollar rose as durable-goods orders excluding transportation equipment increased more than forecast last month, signaling parts of the U.S. economy are weathering a housing market slump.

Futures on the Chicago Board of Trade showed traders are now betting the U.S. central bank will hold the target lending rate at 2.25 percent on April 30. There's a 74 percent likelihood of a cut to 2 percent. Two-year German government bonds yield 1.43 percentage points more than similar-maturity Treasuries, from 1.49 percent yesterday.

The dollar is likely to be supported against the yen as the Treasury yield curve is flattening, showing increased expectations the Fed will pause in its rate cuts, according to BNP Paribas SA, France's largest bank. The yield curve is a graph that charts the yields of bonds with different maturities.

Yield Advantage

The extra yield 10-year Treasuries pay over two-year notes narrowed to 1.43 percentage points today, from an almost four year-high of 2.08 percentage points on March 6.

``The flattening yield curve comes in line with the Fed getting more concerned about the inflation outlook,'' BNP Paribas analysts led by Hans-Guenter Redeker, London-based global head of currency strategy, wrote in a research note yesterday. ``We expect the dollar-yen to remain bid.''

Investors should buy dollars with a target of 105 yen and a sell order at 103.20 yen to limit losses, the report said.

The euro weakened against the dollar yesterday as the Munich-based Ifo institute said its German business climate index fell this month to the lowest in two years.

ECB President Jean-Claude Trichet told reporters at a conference in Frankfurt yesterday that he is concerned the euro's surge may hurt the economy. The euro has appreciated 7 percent this year against the dollar on speculation inflation and higher fuel prices will discourage the ECB from lowering borrowing costs from a six-year high of 4 percent.

Oil Correlation

The euro versus the dollar has had a correlation of 0.96 with the price of crude oil over the past 12 months, according to data compiled by Bloomberg. A reading of 1 would mean they move in lockstep. Crude for June delivery rose to a record $119.90 on April 22. It dropped to $115.95 a barrel today, from $115.90 yesterday.

``Dollar weakness had boosted speculative investment in oil,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., Japan's third- largest bank by assets. ``Higher oil then had further prompted dollar-selling and euro-buying. This is reversing now.''

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: April 25, 2008 07:08 EDT