By Anna Rascouet Nov. 11 (Bloomberg) -- The dollar dropped to a 15-month low against the currencies of major U.S. trading partners as stocks rose worldwide and investors bet the Federal Reserve won’t raise its target lending rate any time soon. Iceland’s krona erased gains after Moody’s Investors Service lowered the nation’s credit rating by two notches to the lowest investment grade as its financial industry failure continues to hurt public finances. Sterling fell after Bank of England Governor Mervyn King said the decline in the pound will help in rebalancing the economy. “There are two factors for the dollar’s weakness, risk appetite and the market is expecting no imminent rate hike,” said Jane Foley, research director at the online currency trader Forex.com in London. “There is no element to suggest that this should reverse.” The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.2 percent to 74.889 at 7 a.m. in New York. It reached 74.774, the lowest level since August 2008. The gauge has fallen 7.9 percent in 2009. Iceland’s krona was little changed at 124.25 per dollar, compared with 124.20 yesterday, after rising 0.3 percent. Moody’s cut its rating on foreign and local currency bonds to Baa3 from Baa1, it said in a statement today. The government and the central bank are relying on a $2.1 billion International Monetary Fund loan to rebuild the economy, which suffered the worst decline in the Western world during the credit crisis. Stronger Real Brazil’s real gained 0.6 percent to 1.7008 per dollar and Norway’s krone appreciated 0.4 percent to 5.5645 on speculation investors will increase carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. The target lending rate of zero to 0.25 percent in the U.S. makes the dollar a favored target for investors seeking to fund carry trades. San Francisco Fed Bank President Janet Yellen raised the prospect of a “jobless recovery” in a speech yesterday in Phoenix, while Dennis Lockhart, who heads the Atlanta Fed, predicted a “relatively subdued pace of growth” this quarter and beyond. The comments are among the first on the economy since the Fed signaled last week that a return to growth alone won’t be enough to change its policy of keeping interest rates near zero for “an extended period.” Instead, the central bank said any change would depend on increases in employment and inflation. Dollar Versus Euro The dollar weakened 0.3 percent to $1.5033 per euro, from $1.4993 yesterday. The U.S. currency gained 0.2 percent to 89.97 yen, from 89.81. The euro strengthened 0.4 percent to 135.25 yen, from 134.65. The MSCI World Index of shares advanced 0.5 percent, and futures on the Standard & Poor’s 500 Index climbed 0.7 percent. Sterling slid 0.4 percent to $1.6671 and weakened 0.7 percent to 90.21 pence per euro. Bank of England Governor Mervyn King told reporters in London today that the pound’s 20 percent slide over the past two years will help “smooth” a rebalancing in the U.K. economy away from domestic spending and toward exports. Officials have an “open mind” on whether to keep buying bonds, said King, indicating the central bank isn’t ready to withdraw stimulus in the coming months. The bank said inflation will stay below its 2 percent target for most of the next three years before edging above that level. The forecasts are based on investor assumptions that the benchmark interest rate, currently at 0.5 percent, will rise to 1.1 percent in the third quarter. To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net

Source