Feb. 10 (Bloomberg) — Investors should sell the dollar versus the euro because the U.S. currency has reached its ``peak'' and reflects expectations the Federal Reserve will keep raising interest rates, said Goldman, Sachs & Co.

The dollar climbed nearly 3 percent against the euro since trading at its low for the year last month as investors increased bets the Fed will raise its target rate two more times. A majority of futures traders are now pricing in rate increases at the Fed's meetings in March and May.

``The dollar is going to have a hard time, said Jens Nordvig, a currency strategist in New York with Goldman, in an interview yesterday. ``Investor expectations for the Fed will run out of steam.

Against the euro, the dollar weakened to $1.1999 at 2:40 p.m. in Tokyo from $1.1980 yesterday in New York. The U.S. currency has rallied from $1.2323 on Jan. 25, the weakest since September.

Goldman, the eighth-biggest trader in the $1.9 trillion-a- day currency market, recommended selling the dollar at $1.1950 per euro on Feb. 8. The firm said to exit the trade to limit losses should the currency close stronger than $1.1780.

Nordvig, who joined Goldman's London office in 2001 from the financial research firm IDEAGlobal, expects the dollar to decline to $1.25 per euro in six months and to $1.30 in a year.

Traders are pricing in a 94 percent chance the Fed will raise its federal funds rate a quarter-percentage point to 4.75 percent at a March 28 meeting. The odds of another quarter-point increase at the next meeting on May 10 are now 59 percent, up from about zero percent last month. The Fed raised its benchmark rate at a 14th consecutive meeting on Jan. 31.

`Unlikely'

The central bank said in a statement accompanying the decision that ``some further policy firming may be needed to keep inflation in check even as it stopped saying rates may rise at a ``measured pace.

``A further significant upward shift in rate expectations seems unlikely in the near term given the current Fed language and the uncertainty about the strength of the data ahead of the March meeting,'' wrote Nordvig, who has a masters degree in economics from the University of Aarhus in Denmark.

Demand for the dollar increased after former Fed Chairman Alan Greenspan bolstered speculation the central bank will continue raising interest rates.

Greenspan suggested at a dinner on Feb. 7 that low long- term rates were limiting the Fed's ability to manage the economy, according to a person briefed by a participant at the meeting. Greenspan made his comments to about a dozen clients of Lehman Brothers Holdings Inc. in New York, according to the person, who declined to be identified.

Kerri Cohen, a spokesman for Lehman in New York, on Feb. 8 declined to comment about Greenspan speaking to customers.

Lehman Recommendation

Lehman is recommending investors increase bets the dollar will rise versus the euro on expectations new Fed Chairman Ben Bernanke will ``leave the door open'' for more interest-rate increases, according to a report.

``We expect the dollar's bullish momentum to remain intact, James McCormick, Lehman's London-based head of global currency research, wrote in a report sent to clients yesterday. ``Bernanke is more hawkish than many in the market assume.

McCormick didn't mention the dinner in his report.

Twin Deficits

Nordvig also said the dollar may decline on speculation widening U.S. trade and federal budget deficits will undermine demand for the currency. The White House projects a record budget deficit of $423 billion for the current fiscal year.

A report today may show the trade shortfall grew to $65 billion in December, the third-largest ever, based on the median forecast in a Bloomberg survey. The gap was a record $68.1 billion in October. A widening deficit means more dollars need to be converted to other currencies to pay for imports.

``We also judge that the dollar is vulnerable from a structural perspective, wrote Nordvig. ``External imbalances in the U.S. are not a key market focus at the moment, but this could change on signs of weakening flow support.

The Treasury Department will release its report on foreign holdings of U.S. assets for December on Feb. 15. Foreign investors raised their holdings of Treasury notes, corporate bonds, stocks and other financial assets by $89.1 billion in November, a slower pace than the record $104.2 billion gain a month earlier.

``We could see a slowdown in portfolio inflows in the official statistics in coming months, Nordvig wrote. Next week's data will be ``the first signpost to watch, he said.

Goldman also recommended selling the dollar versus South Africa's currency on expectations the rand will benefit from ``broad dollar weakness.''

The rand will also gain because the decline in gold prices is ``coming to end,'' Nordvig wrote. Gold, South Africa's largest export, fell 3.8 percent on Feb. 7, the biggest one-day drop since October 1997, after surging to a 25-year high last week. The precious metal rose 1.5 percent yesterday.

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