By Ye Xie and Oliver Biggadike Aug. 12 (Bloomberg) -- The dollar declined for a second day versus the euro before a meeting of the Federal Reserve at which economists forecast policy makers will commit to keeping interest rates at a record low. The Norwegian krone gained against the 16 most-traded currencies after the central bank said it may need to increase its key interest rate earlier than projected. The pound fell against the euro after the Bank of England said it may miss its inflation target amid a “slow and protracted” recovery. “The BOE is pointing to be on hold for a long time here,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “That might be the potential message from the Fed today too. I am not convinced that the dollar’s negative relationship to the risk appetite is done just yet.” The dollar traded at $1.4193 per euro at 10 a.m. in New York, from $1.4149 yesterday. Japan’s currency was at 96.16 per dollar, from 95.99. The yen was at 136.48 per euro, from 135.82, after earlier strengthening to 134.09, the highest level since July 30. The Norwegian krone gained 1.5 percent to 8.691 per euro after the Oslo-based Norges Bank left the overnight deposit rate unchanged at 1.25 percent and said it may start raising rates earlier than it had previously indicated. “It appears that output and employment in Norway may slow somewhat less sharply than expected,” Governor Svein Gjedrem said in the statement. “Should these developments continue, it may be appropriate to increase the interest rate earlier than projected in the previous Monetary Policy Report.” Slow Recovery The krone has gained 11.8 percent versus the euro this year and 13.5 percent against the dollar as the oil-rich economy shows signs of emerging from the global crisis. The pound fell 0.2 percent to 86.01 pence per euro after the central bank said inflation will stay below its 2 percent target as the economy endures a “slow” recovery. Central bank Governor Mervyn King said it’s “more likely than not” inflation will slow below 1 percent this year and unemployment reached a 14-year high. Britain’s consumer prices rose at a 1.8 percent annual rate in June, according to the U.K. Office for National Statistics. The Bank of England, which said last week it will expand its asset-purchase program by 50 billion pounds ($82 billion), said economic growth may resume on an annual basis by 2010, according to forecasts released today in London. The yield on the U.K. March 2010 interest-rate futures contract slid 7 basis points to 1.29 percent as investors pared bets on the central bank lifting borrowing costs. ‘Behaving Defensively’ “Many players are behaving defensively, taking risk off the table before the FOMC,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “There’s a lot of risk surrounding the statement itself. There’s a non-trivial chance that the Fed signals it will let some of the accommodative policy measures end early.” The Federal Open Market Committee will keep rates unchanged at a range of zero to 0.25 percent today, according to all 47 economists surveyed by Bloomberg. The central bank has bought $252.761 billion of Treasuries since it announced a six-month plan in March to purchase $300 million of debt to cap borrowing costs. “The Fed will be positive on the economy but they most likely won’t change their quantitative-easing program,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “There’s still concern about the outlook and whether they’ve done enough and if lending is picking up. If you had to be short or long, I would be short on the dollar.” A short position is a bet an asset will decline. The dollar is likely to depreciate to 92 yen by year-end, Westpac’s Callow said. Yield Differential The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against the euro, yen, pound, Swedish krona, Canadian dollar and Swiss franc, lost 0.3 percent to 78.949 today. The difference in yield, or spread, between 10-year Treasuries and similar-maturity German debt was at 22 basis points today, down from 41 basis-points on Aug. 5. The spread between U.S. and Japanese debt was at 225 basis points today, compared with 241 basis points at the end of last week. A basis point is 0.01 percentage point. The dollar rallied 1.1 percent on Aug. 7 as a better-than- expected U.S. job report triggered speculation the Fed may have to raise interest-rates earlier next year. “People will see if the Fed today will allow recent trends for dollar strength to continue,” said Brian Kim, a Stamford- based currency strategist at UBS AG, the world’s second biggest currency trader. “People should probably be selling, paring back from positions and profit taking whatever dollar shorts that they had.” To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.netOliver Biggadike in New York at obiggadike@bloomberg.net;

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