By Inyoung Hwang and Lukanyo Mnyanda Jan. 22 (Bloomberg) -- The dollar fell from almost the highest level against the euro since July on speculation President Barack Obama’s proposal to rein in trading by financial institutions will reduce investment in U.S. assets. Japan’s yen headed for a second weekly gain versus all of its most-traded counterparts as a drop in global stocks on the White House’s plan to limit risk taking and concern China will slow economic growth discouraged demand for higher-yielding assets. Sterling fell against the dollar for a third day as the U.K.’s retail sales grew in December less than expected. “The currency market still seems to be a little bit perplexed in terms of how they want to play this,” said George Davis, chief technical analyst at Royal Bank of Canada in Toronto. “Should they be buying the U.S. dollar because of increased levels of risk aversion? Or should they be selling on diminishing levels of U.S. competitiveness in the capital markets?” The dollar depreciated 0.2 percent to $1.4116 per euro at 9:31 a.m. in New York, from $1.4084 yesterday, when it appreciated to $1.4029, the strongest level since July 30. The U.S. currency decreased 0.1 percent to 90.33 yen, from 90.43, after sliding earlier to 89.79, the lowest level since Dec. 18. The euro traded at 127.58 yen, compared with 127.37. Obama called yesterday for limiting the size and trading activities of financial institutions as a way to reduce risk taking and prevent another financial crisis. Regulatory Overhaul The proposals would be part of an overhaul of regulations prohibiting banks from proprietary trading or investing in hedge funds and private-equity funds. The Standard & Poor’s 500 Index lost 0.2 percent, extending its drop this week to 2 percent. “Equity markets hold the key right now,” Davis said. “If traders see the equity markets bounce back a little bit, they’ll have some confidence in buying the U.S. dollar.” The yen headed for a weekly gain versus the euro, trading 2.6 percent stronger. Japan’s currency tends to rise during times of economic and financial turmoil because Japan’s trade surplus makes it less reliant on foreign capital. “We’re not over this wave of risk aversion yet,” said Sebastien Galy, a foreign-exchange strategist at BNP Paribas SA in New York. “It’s settled down, but we probably still have two to three more days to go.” Weaker Sterling Sterling fell 0.6 percent to $1.6093 after the Office for National Statistics said the U.K.’s December retail sales by volume rose 0.3 percent last month. The median forecast of 27 economists in a Bloomberg survey was for a 1.1 percent gain. UniCredit SpA, the fourth-best forecaster on the pound versus the dollar last year, cut its 2010 prediction today, citing the U.K.’s deteriorating growth prospects. “We lowered our target based on expectations the recovery in U.K. economic activity will remain very moderate at least for most of the first half,” Roberto Mialich, a senior global- currency strategist in Milan, said by e-mail. The euro was headed for a 1.9 percent weekly decline against the dollar on concern Greece will fail to contain its budget deficit within the European Union’s limits, diminishing the appeal of the 16-nation euro region’s assets. European finance ministers said on Jan. 19 the crisis in Greece is affecting other nations, the same day Moody’s Investors Service said the success of the government’s budget plan “cannot be taken for granted.” The International Monetary Fund said on Jan. 20 that Portugal should begin reining in its deficit this year. China’s Inflation Inflation accelerated to a more-than-forecast 1.9 percent in December and gross domestic product climbed 10.7 percent, the National Bureau of Statistics said in Beijing yesterday. Since October, policy makers have said managing inflation expectations is one of the government’s central objectives. “Fears that China’s central bank will tighten monetary policy to cool the overheating economy are pushing commodity currencies lower,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Risk aversion is the dominant theme, so the yen is being bought.” Policy makers will likely act sooner than previously anticipated to contain prices, a Bloomberg News survey of economists showed this week. The People’s Bank of China will raise interest rates by the end of June and also ratchet up banks’ reserve requirements, according to the median of 17 forecasts. A survey on Jan. 8 indicated the bank would wait until the third quarter before lifting borrowing costs. To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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