The dollar dropped the most in more than a week against the euro on concern Israeli attacks on Hamas in the Gaza Strip will fan Middle East tensions and disrupt oil supplies to the U.S., the world’s biggest energy consumer. The greenback also slid versus the yen before U.S. housing and manufacturing reports this week that may show the world’s largest economy is slipping further into recession. The British pound fell to near a record low against the euro after a survey of U.K. estate agents and surveyors forecast home prices will slide in 2009, extending this year’s declines. “The tensions in the Middle East appear to be causing buying of the euro,’ said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “When there’s geopolitical risk in that region, the dollar tends to be sold.” The U.S. currency slid 1.5 percent, the most since Dec. 17, to $1.4238 per euro at 8:20 a.m. in London, from $1.4028 late in New York on Dec. 26. It reached $1.4272, the lowest level since Dec. 19. The greenback may weaken to $1.4600 per euro by the end of next month, Sakai said. Against the yen, the dollar fell to 90.44 from 90.81. It touched 87.14 on Dec. 17, the lowest level since July 1995. The U.S. currency has dropped 19 percent versus the yen this year, the largest loss since 1987. The pound slid to 96.82 pence per euro, the weakest since the all-time low of 97.32 pence on Dec. 25, before trading at 96.59 pence. It has fallen 24 percent this year, the most since the euro’s debut in 1999. The U.K. currency rose 1.2 percent to $1.4760. Israeli Air Strikes The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1 percent to 80.110. The dollar weakened against 15 of the 16 most-active currencies after Israeli air strikes in the Gaza Strip increased concerns that oil shipments from the Middle East, the world’s largest producing region, will be disrupted. The air strikes killed more than 285 people, prompting protests across the region from Saudi Arabia to Syria. Israel called up 7,000 reservists after two days of attacks on the Hamas-controlled region. Crude oil for February delivery rose as much as $2.11, or 5.6 percent, to $39.82 a barrel in after-hours electronic trading on the New York Mercantile Exchange. ‘People are Worried’ The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep. The greenback also slid on speculation U.S. housing and manufacturing reports this week will show the economy is deteriorating. “People are worried over how bad the U.S. recession is getting and this week’s data may heighten those concerns,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. The greenback may weaken to 90.25 yen today, Soma said. U.S. home prices for the 20 largest metropolitan areas fell 17.8 percent in October from a year earlier, the biggest decline since record-keeping began in 2001, according to a Bloomberg News survey of economists before the S&P/Case-Shiller index is published tomorrow. The Institute for Supply Management’s December factory index dropped to 35.4, the lowest reading in almost three decades, a separate Bloomberg survey shows. The ISM report is due Jan. 2. ‘In Worse Shape’ The Federal Reserve this month cut its benchmark interest rate to as low as zero for the first time and shifted its focus to debt purchases in an effort to revive the economy. The British pound headed for a second annual loss versus the euro as a deepening U.K. economic slump may prompt the Bank of England to cut interest rates, which at 2 percent are the lowest since 1951. “The Bank of England is still expected to cut rates in coming months to support the U.K.’s economy, which seems to be in worse shape than the euro-zone’s economy,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “This is likely to weigh on the pound,” which may decline to 96.50 pence per euro today, Lee said. Residential property prices dropped 8.7 percent on average in the U.K. this year, led by a 10.1 percent slide in London, Hometrack Ltd. said in a report today. Prices are forecast to fall a further 10 percent next year and 3 percent more in 2010, the property researcher said on Dec. 22. The pound may rebound from its worst year on record against the euro as investors start betting on a recovery in the U.K. economy, according to the world’s biggest currency traders. The U.K. currency will strengthen 14 percent against Europe’s common currency next year, after depreciating about 22 percent in 2008, based on the median forecast of 42 analysts and strategists surveyed by Bloomberg. Deutsche Bank AG, the largest trader as measured by Euromoney Institutional Investor Plc, predicts a 20 percent gain.

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