The dollar gained against the euro, reversing earlier losses, before a speech tomorrow by Federal Reserve Chairman Ben S. Bernanke.

The currency has rebounded 1.3 percent after approaching a 16-month low at $1.2938 per euro on Aug. 21. Investors may be reluctant to add to bets it will fall further amid lingering speculation the U.S. central bank will lift borrowing costs again this year, after 17 rate boosts in two years, some traders said.

``It is still a 50-50 chance the Fed may raise rates one more time,'' said Richard Vullo, head of corporate foreign exchange sales at Fortis Financial Services LLC in New York. ``Until we have confirmation from the Fed, it is hard to see the dollar get hammered.''

The U.S. currency advanced to $1.2768 per euro at 12:57 p.m. in New York, from $1.2787 late yesterday, after earlier weakening to $1.2842. It was little changed at 116.49 yen.

The dollar fell earlier against the euro after a measure of German business confidence declined less than economists forecast, bolstering the case for the European Central Bank to raise rates twice more this year. It reversed the loss even after a report showed the U.S. housing market is weakening.

Bernanke will give the opening speech at a Kansas City Federal Reserve Bank symposium in Jackson Hole, Wyoming. The Fed held its benchmark overnight rate at 5.25 percent this month, pausing after 17 straight rate increases. The Fed meets next on Sept. 20 to set rates.

Fed Message

Fed Bank of Chicago President Michael Moskow two days ago said the central bank may need to resume lifting borrowing costs because inflation remains a threat.

``Until we get over the Fed meeting and a clear message from the Fed that they are done, the dollar may still have some support here,'' said Joseph Francomano, vice president of foreign exchange at Erste Bank in New York. The dollar may rally to $1.27 in the next two weeks, he said.

The probability that the central bank will lift the overnight target rate by another quarter-percentage point this year was at 43 percent today, based on the December fed funds futures contract. It is down from 47 percent yesterday and 100 percent before the Fed's last meeting on Aug. 8.

Interest rate differentials widened in favor of U.S. government debt today. Two-year Treasuries yielded 137 basis points more than comparable-maturity German bonds, after reaching 124 basis points on Aug. 18, the narrowest in 16 months. A basis point is 0.01 percentage point.

Dollar's 2006 Decline

The dollar has fallen about 8 percent against the euro this year on speculation the ECB will lift rates more than the Fed.

The U.S. currency reached its lowest level today after the Ifo institute said its index of German business confidence fell to 105 from 105.6 last month, compared with a medium forecast in a Bloomberg survey of 104.8.

The dollar also weakened earlier after a Commerce Department report showed U.S. sales of new homes fell in July to an annual pace of 1.07 million. The median forecast in a Bloomberg News survey was for a reading of 1.1 million, compared with 1.12 million in June.

``The euro has failed to gain traction'' because too many investors have are betting it will rise further against the dollar this year, said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston

The net number of futures bets on euro gains was 90,204 in the week ending Aug. 15, Commodity Futures Trading Commission data show. The prior week bets on the euro reached an all-time high of 92,108.

ECB policy makers have raised rates four times since December, to 3 percent. Traders expect another two increases to 3.5 percent by year-end, futures trading suggests. The yield on the December three-month Euribor futures contract was 3.63 percent today, up from 3.625 percent yesterday.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark since the currency's launch in 1999.

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By Michael McDonald and Min Zeng

To contact the reporter on this story: Michael McDonald in New York at mmcdonald10@bloomberg.net ; Min Zeng in New York at mzeng2@bloomberg.net .

©2006 BLOOMBERG L.P. ALL RIGHTS RESERVED.