The U.S. currency dropped to a 26-year low against the

pound and the weakest since 1985 against the New Zealand dollar yesterday on concern that weakness in U.S. housing will curb economic growth and push the Federal Reserve to cut interest rates. Investors bought yen yesterday in part on speculation investors will exit risky trades because of mounting losses in U.S. securities backed by subprime mortgage loans.

Today's producer-price data ``may act as a catalyst to push

down the dollar further given that we are in such a bearish

environment'' for the currency, said David Powell, a currency

strategist at research firm IDEAglobal in New York.

The dollar traded at 121.88 yen, $1.3773 per euro and

$2.0363 per pound at 5:47 a.m. in Tokyo. The dollar dropped to a record low of $1.3814 per euro on July 13 and touched $2.0403 per pound yesterday, the weakest since June 1981.

Producer prices probably rose 0.2 percent last month, after

a 0.9 percent jump a month earlier, according to the median

forecast in a Bloomberg News survey. The government releases the data at 8:30 a.m. in Washington.

A separate report from the Treasury Department is forecast

to show net foreign purchases of U.S. stocks, notes and bonds

slowed to $70 billion in May from $84.1 billion in April. The

data is due at 9 a.m. in Washington.

Bernanke's Testimony

Fed Chairman Ben S. Bernanke may address the housing slump, as well as the outlook for growth and inflation, in testimony

before the House Financial Services Committee tomorrow. The U.S. government may say tomorrow that consumer-price growth slowed to 0.1 percent in June from 0.7 percent the month before, according to a separate Bloomberg News poll.

Slowing inflation ``will confirm the sustainability of the

bearish sentiment for the dollar,'' said Matthew Strauss, a

senior currency strategist in Toronto at RBC Capital Markets

Inc., a unit of Canada's biggest bank by assets. Interest-rate

differentials are ``weighing on the dollar.''

The U.S. currency fell past 79 U.S. cents per New Zealand

dollar yesterday, the weakest since New Zealand's central bank

allowed its currency to trade freely in March 1985. The dollar

also touched a 30-year low of 96 U.S. cents against the Canadian dollar.

The Fed kept its benchmark rate at 5.25 percent for an

eighth straight meeting on June 28. The rate compares with

benchmarks of 4 percent in the euro zone, 5.75 percent in the

U.K., 8 percent in New Zealand and 4.5 percent in Canada.

Interest-Rate Bets

Traders have stepped up bets the Fed will cut rates. The

yield on fed funds futures contracts due in December was 5.21

percent yesterday, down from 5.235 percent on July 9. The

current yield suggests traders see about a 24 percent chance the Fed will cut its benchmark to 5 percent by year-end. The

probability was 9 percent a week ago.

``The interest rate outlook doesn't work in the dollar's

favor,'' said Mark Meadows, a trader at currency-trading firm

Tempus Consulting Inc. in Washington. ``The Fed has to come back to cut rates later this year to spur growth'' while central

banks in Europe and the U.K. may lift rates.

Meadows predicted the dollar will fall to $1.40 per euro