Sept. 14 (Bloomberg) -- The dollar declined against the euro and the yen after a government report showed U.S. retail sales in August dropped by the most since November 2001.

``It's likely that we'll see several pieces of weaker U.S. economic data over the next few weeks,'' said Mansoor Mohi-uddin, global head of currency strategy in London at UBS AG, said before the report. ``That's going to push the dollar down.'' UBS is the second-largest foreign-exchange trading bank.

The U.S. currency has lost 2.1 percent in the past three months on concern consumer confidence has been hurt by record gasoline prices. A survey by Investor's Business Daily and TechnoMetrica Market Intelligence yesterday showed consumers grew more pessimistic after Hurricane Katrina this month.

Against the euro, the dollar weakened to $1.2318 at 8:33 a.m. in New York, from $1.2267 late yesterday, according to the EBS currency-dealing system. The dollar dropped to 110.03 yen, from 110.65 yen. Mohi-uddin forecasts the dollar may fall to $1.27 per euro in one month's time.

U.S. sales at auto dealers and other retailers fell 2.1 percent after rising 1.8 percent in July, the Commerce Department said in Washington. Economists surveyed by Bloomberg expected a 1.4 percent decline, based on the median of 61 forecasts.

The yen also gained after Toshikatsu Fukuma, who votes on interest rates at the Bank of Japan, said the central bank should cut the amount of money it pumps into the banking system.

Fukuma said in a speech to executives in Fukui City, Japan, that the central bank should ``gradually'' lower its target for funds available to lenders because Japan's economic recovery is ``sustainable'' and banks no longer need so much cash.

`Process Begins'

``The BOJ is beginning to prepare the market for a more restrictive monetary policy,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``They are some way from raising rates, but this is how the process begins and will be positive for the yen.''

The Bank of Japan has raised its reserve target seven-fold since it adopted the policy in March 2001 to overcome deflation and spur growth.

In the U.S., consumer confidence fell to the lowest level in more than four years, according to the release of the index by Investor's Business Daily and the TIPP unit of TechnoMetrica Market Intelligence yesterday, which may foreshadow the University of Michigan's confidence report due this week.

``It's all about growth, for the dollar,'' said Claudio Piron, a foreign-exchange strategist at JPMorgan Chase & Co. in Singapore. ``If retail sales disappoint, it should bring the dollar back to around 110 yen.''

Sentiment Index

Lehman Brothers Holdings Inc. cut its forecast for the widely followed University of Michigan sentiment report from 87 to 84 after the release of the index by Investor's Business Daily and the TIPP unit of TechnoMetrica Market Intelligence.

A Merrill Lynch & Co. survey showed greater pessimism from investors, a finding also reflected in a poll of corporate chiefs by executive-development company TEC International.

The dollar's decline may be limited on speculation the U.S. Federal Reserve will still raise its benchmark interest rate next week, the 11th increase since June last year.

``Economic numbers may show a bit of a slowdown because of the impact of the hurricane but this is likely to be very temporary,'' said Hans Guenter Redeker, head of currency strategy at BNP Paribas SA in London. ``The Fed is going to continue to raise rates and the interest-rate spread will keep widening in favor of the dollar.''

Global fund managers maintained their expectations that the Fed will stick to its policy of raising interest rates even after the destruction caused by Hurricane Katrina, according to a monthly survey by Merrill Lynch published yesterday.

`Limited and Temporary'

European Central Bank President Jean-Claude Trichet said today the impact of the hurricane will probably be ``limited and temporary,'' speaking to the European Parliament's Economic and Monetary Affairs Committee in Brussels. He also said conditions are in place for an economic pickup in the 12-nation economy.

The yield on the October federal funds futures contract yesterday traded at 3.705 percent, showing traders are pricing in an 82 percent chance that the central bank will raise its target rate to 3.75 percent. The odds were about 100 percent before the hurricane.

To contact the reporter on this story:
Rodrigo Davies in London at  rdavies13@bloomberg.net;
Joshua Krongold in New York at  jkrongold2@bloomberg.net.

Last Updated: September 14, 2005 08:34 EDT

Commentary:
Recall that in 2001, we had a recession. For those of you who are new to this site it's important that you know that 911 ended the recession, it didn't start it as many would have you believe.

The recession began in March 2001 and ended in December 2001, just two months after 911.