Dec. 30 — The euro rose the most in almost two weeks against the dollar as the conflict between Israel and Hamas in the Gaza Strip drove up oil prices, adding to concerns that an economic slump will deepen in the world’s biggest fuel consumer.

The common European currency climbed the most in a week versus the yen amid speculation it will attract funds as the Bank of Japan favors near-zero interest rates. The dollar fell against the British pound and the Swiss franc before U.S. housing and manufacturing reports this week that may show the economy is sliding further into recession.

“The mood in the market now is to buy the euro and sell the dollar because it’s the safest bet,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc. “Mideast tensions aren’t good for the U.S. economy.”

The euro rose 1.2 percent, the most since Dec. 17, to $1.4096 as of 11:25 a.m. in Tokyo from $1.3927 late in New York yesterday. It pared this year’s decline to 3.4 percent. The currency also gained 0.9 percent to 127.38 yen, the biggest advance since Dec. 22, trimming this year’s loss to 22 percent.

The single European currency climbed to 97.26 British pence from 96.71 pence yesterday, when it reached a record 98 pence. It has risen 32 percent in 2008. The currency may advance to 128 yen today, Ogawa said. Exchange-rate movements may be exaggerated because of the year-end holidays, he said.

The dollar fell 0.3 percent to 90.39 yen, declined 0.8 percent to $1.4505 against the British pound and slipped 0.9 percent to 1.0527 versus the Swiss franc.

Israel, Hamas

The greenback weakened against 14 of the 16 most-active currencies after Israel hinted it may broaden its assault on the Hamas-controlled Gaza Strip with a ground operation after three days of air raids failed to end cross-border rocket attacks.

Crude oil for February delivery rose for a third day, climbing 0.7 percent to $40.30 a barrel in after-hours trading on the New York Mercantile Exchange. 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 dollar snapped two days of gains against the pound and fell for a third day versus the franc before U.S. reports this week that economists estimate will show the recession deepened.

Home prices for the 20 largest metropolitan areas in the U.S. fell 17.9 percent in October from a year earlier, the biggest decline since record keeping began in 2001, according to economists in a Bloomberg survey before the S&P/Case-Shiller index is published today.

‘Bad Shape’

The Institute for Supply Management’s December factory index dropped to 35.4, the lowest reading since 1982, a separate Bloomberg survey showed. The ISM report is due Jan. 2.

“The U.S. economy is in a bad shape and there are worries that it may get worse,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The dollar is being sold.”

The dollar may weaken to $1.4100 per euro and 90 yen today, Ishikawa said.

Japan’s currency declined against the euro, trimming this year’s gain to 28 percent, on prospects Japanese investors will seek higher returns abroad.

The benchmark interest rate is 0.1 percent in Japan, compared with 2.5 percent in the 15-nation euro area, 4.25 percent in Australia and 5 percent in New Zealand.

“From an interest-rate differential perspective, the euro and Oceanic currencies are attractive,” said Yoshisada Ishide, a fund manager who overseas the equivalent of around $1.5 billion at Daiwa SB Investments Ltd. in Tokyo. “Investors might not be able to live in a world with zero return, so they may place their money offshore.”

Australia’s dollar gained 0.4 percent to 62.33 yen from 62.10 yen in New York yesterday and New Zealand’s dollar rose 0.5 percent to 52.44 yen from 52.19 yen.