July 29 — The dollar traded near a one-week low against the euro on speculation an industry report today will show the U.S. housing slump deepened, increasing the risk credit-market losses will widen.

Signs of a weakening economy may deter the Federal Reserve from increasing borrowing costs, diminishing the allure of dollar-denominated assets. The greenback snapped a five-day advance versus Canada’s dollar after the International Monetary Fund said there’s no end in sight to the U.S. housing recession. The yen rose as a decline in Asian stocks prompted investors to pare holdings of higher-yielding assets funded in Japan.

“I still remain super dollar-bearish,” said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest publicly traded lender by assets. “As long as housing prices are plunging, the U.S cannot pull the economy out of its slump. Systemic risks of a credit crisis still prevail.”

The dollar traded at $1.5745 per euro at 12:48 p.m. in Tokyo, from $1.5741 late yesterday in New York and near a July 23 low of $1.5798. The U.S. currency weakened to 107.37 yen from 107.46 yesterday, and to C$1.0210 against the Canadian dollar from C$1.0226. The euro slid to 169.07 yen from 169.17.

The U.S. currency may fall to $1.58 a euro and 107 yen today, Kato forecast.

China’s yuan strengthened by the most in two weeks after central bank Governor Zhou Xiaochuan underscored policy “continuity and stability,” spurring speculation that China will let the currency rise further to stem inflation. It climbed 0.2 percent to 6.8262 per dollar.

Prolonged Slowdown

U.S. home prices in the S&P/Case-Shiller index fell 16 percent in May from a year ago, the most on record, according to the median forecast of economists surveyed by Bloomberg News. The report is due at 9 a.m. New York time.

A “bottom” in the U.S. housing recession is “not visible,” said the IMF, which warned in a report that deteriorating credit conditions for consumers and banks may prolong a period of slow growth.

The yen gained as the MSCI Asia Pacific Index of regional equities fell 2.2 percent on concern widening credit losses will slow global economic growth and make banks reluctant to lend. Merrill Lynch & Co. said it will have $5.7 billion of pretax writedowns in the third quarter.

The yen is a favorite funding currency for so-called carry trades, in which investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits.

`Loom Large’

Japan’s benchmark interest rate is 0.5 percent, the lowest of major economies and compares with 4.25 percent in the euro area, 7.25 percent in Australia and 8 percent in New Zealand.

“Concern over the financial turmoil still loom large,” said Masashi Kurabe, head of currency sales and trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Hong Kong, a unit of Japan’s largest publicly traded lender by assets. Risk reduction among investors “will cause yen-buying further.”

The yen may rise to 106.80 a dollar today, Kurabe said.

U.S. stocks and the dollar fell yesterday even after U.S. Treasury Secretary Henry Paulson stepped up his push to create a new market for mortgage financing, releasing guidelines for issuers of covered bonds. He said covered bonds will help provide financing to a U.S. mortgage market that now depends on Fannie Mae and Freddie Mac and other government-linked institutions for more than 70 percent of funds.

`Thin Ice’

“It’s as if the dollar is on cracking, thin ice,” Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., a unit of the U.K.’s third-biggest bank, wrote in a research note today. “Paulson’s proposal on covered bonds as a new source of mortgage financing failed to buoy stock prices.”

The dollar may fall to $1.60 per euro this quarter, he said.

Nonfarm payrolls dropped by 75,000 in July, following a decline of 62,000 in June, according to a Bloomberg survey. The Labor Department will release the employment data Aug. 1.

Futures on the Chicago Board of Trade showed yesterday a 38 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, compared with 41 percent odds a week earlier. Policy makers next meet Aug. 5.

Widening Yield Gap

The yield gap between two-year Treasury notes and similar- maturity German bunds widened to 1.78 percentage points from 1.71 percentage points on July 25, making the U.S. securities less attractive to investors.

Fed Governor Frederic Mishkin said yesterday that the economy has faced “a perfect storm of shocks,” with rising energy prices and a financial crisis. Mishkin made the comments after a speech in Washington.

The euro is “beginning to turn” higher against the dollar after sustaining $1.56, the bottom of an upward trend that started a year ago, wrote Tom Fitzpatrick and Shyam Devani, Citigroup Inc. analysts who use charts to predict a currency’s future movements, in a research note to clients yesterday.

Gains in the yen may be limited after government reports showed Japan’s unemployment rate rose to the highest in almost two years in June and household spending fell, adding to signs the economy’s longest postwar expansion may be coming to an end.

Japan’s “economic developments are still moving at a glacial pace leaving the yen a function of external factors such as oil prices, risk aversion and global growth,” Ashley Davies, a currency strategist in Singapore at UBS AG, the world’s second-largest currency trader, wrote today in a note to clients. “We continue to target the dollar-yen at 105 over one and three months.”