NEW YORK (Bloomberg) — The dollar declined the most in almost four months against the euro and dropped versus the yen last week on speculation the housing market will drag down the US economy.The dollar tumbled against 12 of the 16 most active currencies after a report showed homebuyers with poor credit histories fell behind on their mortgages at the highest rate in four years, raising the likelihood the Federal Reserve will cut borrowing costs sooner. The yen gained on bets investors borrowed less in the currency to buy higher-yielding assets overseas, a practice known as the carry trades.

“The general theme in the market is dollar weakness,” said John McCarthy, director of currency trading in New York at ING Financial Markets LLC. “There are still underlying concerns about the subprime market’s impact and the general health of the US economy.”

The dollar lost 1.55 percent this week against the euro, declining to $1.3318 yesterday from $1.3116 on March 9. Yesterday it touched $1.3339 per euro, the lowest level since December 8. The US currency fell 1.34 percent against the yen to 116.75 from 118.33, wiping out the prior week’s gain of 1.31 percent.

Investors speculate the Fed will relax its vigilance on inflation at its March 21 meeting, McCarthy said. None of the 87 economists surveyed by Bloomberg expects changes to the 5.25 percent benchmark borrowing rate. The odds the Fed will cut its overnight lending rate between banks to 5 percent from 5.25 percent by its June meeting fell to 30 percent yesterday from 32 percent on March 9, US interest-rate futures contracts for July show.

Former Federal Reserve Chairman Alan Greenspan said March 15 he expects the fallout from subprime-mortgage delinquencies to spread to other parts of the economy, especially if home prices decline.

Subprime borrowers fell behind on their mortgages at the highest rate in four years, and foreclosures on all types of home loans rose to an all-time high in the fourth quarter, the Mortgage Bankers Association said earlier this week.

New Century Financial Corp., the second-biggest US subprime mortgage lender, said the Securities and Exchange Commission opened an investigation amid speculation the Irvine, California, company is on the verge of bankruptcy.

The yen gained versus 11 of the 16 most active currencies this week, rising 0.83 percent against the pound to 226.73 and 0.42 percent versus the New Zealand dollar to 81.37.

Volatility on the one-month yen options, a gauge of the risk to put on carry trades, hit an eight-day high of 10.3 percent on March 14 before falling back to 10.025 percent. The one-year average is 8.03 percent.

“The yen should get support in the short term, particularly against the dollar, because the market turbulence isn’t completely over yet,” said Max Tessier, vice president of currency management in Montreal at CIBC Global Asset Management, which manages $2 billion in currency assets.

The Standard & Poor’s 500 Index dropped 1.13 percent for the week, and the Dow Jones Industrial Average fell 1.35 percent, as investors shed riskier assets. Stocks in Europe and Asia fell.

The Bank of Japan meets March 19 in Tokyo to set its benchmark borrowing rate. None of the 49 economists surveyed by the Bloomberg forecast a change from the current level of 0.5 percent, the lowest among major economies.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen versus the dollar compared with those on a gain — so-called net shorts — narrowed to 52,853 on March 13, compared with 62,886 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.

The Swiss franc, another funding currency for the carry trade, gained 2.24 percent against the dollar to 1.2070 this week and 1.70 percent to 2.3448 against the pound.