NEW YORK (Bloomberg) — The euro posted its biggest weekly decline against the dollar since June 2006 on speculation a slowing economy will force the European Central Bank to join the Federal Reserve in reducing interest rates.

Europe's currency fell this week for the first time in three weeks versus the Japanese yen and declined against the Mexican peso and the Taiwan dollar. The pound fell for a second week against the dollar as the Bank of England cut rates.

"As the cracks began to resurface in the European economy, investors are seeing the value in the dollar," said Michael Kastner, fixed-income strategist at Sterling Stamos Capital Management in New York, in an interview with Bloomberg TV.

The euro dropped two percent against the dollar last week to $1.4512, from $1.4802 on February 1. The currency touched $1.4440 on February 7, the weakest level since January 22. Against the yen, the euro dropped 1.2 percent to 155.81, from 157.67 on February 1. The dollar rose 0.8 percent to 107.37 yen, from 106.49.

South Africa's rand fell for a fourth week against all of the other major currencies as power shortages crimped economic growth.

The pound fell one percent against the dollar this week, trading at $1.9455, from $1.9651 on February 1. The Bank of England cut its benchmark rate by a quarter-percentage point to 5.25 percent on February 7, citing slowing global growth.

The rebound in the dollar foreseen by UBS AG, BNP Paribas SA and Deutsche Bank AG is gaining momentum after ECB President Jean-Claude Trichet said on February 7 that "risks surrounding the outlook for economic activity lie on the downside."

Trichet's comments and the resulting gain in the dollar suggest the Fed's decision to lower borrowing costs twice last month put the US economy on course to recover faster than Europe, said traders who have called for a rally in the dollar since the fourth quarter.

"We see further potential for dollar upside versus the euro," said Geoffrey Yu, a currency strategist at Zurich-based UBS who has advised the bank's clients to buy the dollar since at least October. "We've seen the euro collapse on the back of some dovish comments by Trichet and weak economic data. These trends can only continue."

Investors raised bets the ECB will start reducing interest rates in the second quarter. The central bank kept its benchmark interest rate at a six-year high of 4 percent on February 7 to curb inflation.

The US currency has gained 2.4 percent versus the euro since the Fed lowered its benchmark rate a half-percentage point to three percent on January 30, following a three-quarter-point emergency cut eight days earlier. The Fed has reduced the rate 2.25 percentage points since September 18.

Morgan Stanley, the second-largest US securities firm, this week recommended that investors sell euros for dollars because the market is shifting away from "interest-rate differentials toward relative growth differentials." The dollar may rise to $1.32 against the euro at the end of the year, Morgan Stanley forecast.

"I won't be surprised to see the dollar strengthen from here," said Jeff Gladstein, global head of foreign-exchange trading in Wilton, Connecticut, at AIG Financial Products.