new york (Bloomberg) — The dollar weakened to the weakest level against the euro since late September as the Federal Reserve cut the target lending rate to near zero.

The yen rose for a seventh week versus the dollar, its longest rally since December 2004, and touched a 13-year high. Japan's government signaled it may intervene in the foreign-exchange market for the first time in four years to limit the currency's rally. The pound edged closer to parity with the euro, dropping to a record.

"The run-up in the euro is primarily caused by the Fed's move," said Carl Forcheski, vice-president on the corporate currency sales desk at Societe Generale SA in New York. "Traders began to figure maybe the euro would rebound on higher yields because the ECB continues to keep its rates higher."

The dollar fell 3.9 percent to $1.3912 versus the euro yesterday from $1.3369 on December 12, its fourth straight weekly drop. It slumped to a 12-week low of $1.4719 on December 18. The dollar dropped 2.1 percent to 89.31 yen from 91.21, falling to 87.14 yen on December 17, the lowest level since 1995. The euro increased two percent to 124.22 yen from 121.83.

The US currency declined 2.9 percent against the euro on December 17, the biggest one-day drop since the 15-nation currency's 1999 debut. The Fed lowered its target lending rate a day earlier to a range of zero to 0.25 percent. The central bank reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying Treasuries.

South Korea's won was the biggest gainer against the dollar among the 16 major currencies tracked by Bloomberg, increasing 6.4 percent to 1,289.35 as overseas investors bought stocks. South Korea agreed last week on bilateral currency swap accords with Japan and China to ensure financial stability in Asia.

Ukraine's hryvnia fell 5.1 percent against the dollar this week, after paring its loss. The central bank raised its refinancing rates twice after the currency declined as much as 16 percent over two days. The key discount rate remained at 12 percent.

The pound dropped 4.1 percent to 93.29 per euro after weakening beyond 95 per euro on December 18 for the first time since the 15-nation currency's 1999 debut. UK unemployment rose in November at the fastest pace since 1991, the Office of National Statistics reported this week.

The yen gained 25 percent against the dollar this year, the most since 1987, as more than $1 trillion of credit-market losses and a global economic slowdown encouraged Japanese investors to unwind overseas investments and bring money home.

Honda Motor Co. may shift research and development out of Japan and increase overseas manufacturing if the yen strengthens further, President Takeo Fukui said in an interview with journalists yesterday.

Finance Minister Shoichi Nakagawa said a day earlier at a news conference in Tokyo that he has "the means" to limit the yen's rally. Central banks buy or sell currencies when they seek to influence exchange rates.

The Bank of Japan cut its benchmark interest rate to 0.1 percent on Friday. It also increased purchases of government debt and announced plans to buy commercial paper for the first time as the deepening recession starves companies of funds.

The yen will extend gains against the dollar into the first quarter of 2009, according to Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago.