The dollar fell against the euro and the yen on speculation the Federal Reserve will keep interest rates near a record low throughout 2010, reducing the appeal of assets denominated in the U.S. currency. The dollar slid to the lowest level against the euro in more than four weeks after people with knowledge of the selection process said Fed.

Reserve Bank of San Francisco President Janet Yellen is President Barack Obama’s pick for vice chairman of the central bank. Yellen said last month the U.S. economy still needs “extraordinarily low” rates. Goldman Sachs Group Inc. today recommended investors bet that the euro will reverse some of its recent declines versus the dollar.

“Yellen is the Fed’s extended-period language personified,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “This adds weight to my view that we will see sustained pullback in the dollar in the second half of the year.”

The dollar dropped 0.7 percent against the euro to $1.3775 as of 7:14 a.m. in New York. It slipped 0.1 percent to 90.45 yen, while the euro advanced 0.6 percent to 124.62 yen.

As vice chairman, Yellen would have a closer role in guiding the Fed as officials decide how much longer to keep the benchmark rate close to zero and how to use new policy tools to tighten credit as the nation emerges from the worst slump since the 1930s.

Below Potential

In her most recent speech, on Feb. 22, Yellen said the U.S. economy will operate below potential this year and next and still needs low interest rates to gain strength.

“This is not the time to be tightening monetary policy,” Yellen said in San Diego. “But eventually the economy will gain enough momentum and won’t need today’s extraordinarily low interest rates.”

“While we do see sustainable dollar strength in the more distant future, we think the short-term pressures are likely to reverse,’’ Goldman Sachs analysts including Thomas Stolper in London wrote in an e-mailed report today. “We think euro-dollar has the potential to rally from here towards our three-month forecast. We would go long with a stop on a one-day close below $1.35.”

Yen Declines

The yen fell against 14 of its 16 most-traded peers after Japanese Prime Minister Yukio Hatoyama said the government must take “firm measures” to keep the currency’s strength from hurting the economy.

“At a time when Japan’s economy and industries aren’t necessarily strong, I don’t think this is being reflected by the strong yen,” Hatoyama said in parliament today. “We need to take firm measures against such yen strength.”

Finance Minister Naoto Kan, also speaking in the Diet, said the government is ready to intervene in the foreign-exchange market if movements are abrupt. Japanese authorities haven’t stepped into the currency market since they sold 14.8 trillion yen ($163.4 billion) in the first quarter of 2004.

The yen also fell on speculation the central bank will add money to the financial system next week to ease monetary policy and fight deflation.

Easing Options

The Bank of Japan will hold a two-day policy meeting on March 16 and 17. The central bank’s easing options include expanding a 10 trillion-yen fund providing loans to banks, according to two central bank officials who spoke on condition of anonymity.

“The Japanese government is becoming more uncomfortable with a stronger yen,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The BOJ doesn’t want to give markets the impression that it’s exiting its current policy, so is likely to extend or expand the 10 trillion yen loan facility.”

Japan is increasingly likely to intervene in foreign- exchange markets to stop the yen from rising, according to Morgan Stanley.

The probability Japan will sell the yen has climbed to 47 percent, the highest since 2004, said Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley. The prediction is based on a company model that uses indicators such as market positioning and changes in momentum.

‘Out of Step’

“The heightened risk of yen intervention indicated by our model suggests that the level of the exchange rate is out of step with underlying fundamentals,” New York-based Drossos wrote in a note to clients yesterday.

The Swiss franc strengthened to below 1.46 per euro for the first time in more than a year, even after the central bank said yesterday it would act to stem “an excessive appreciation of the Swiss franc against the euro.”

The franc traded at 1.4599, after appreciating to 1.4580 per euro.

Sales at U.S. retailers probably fell in February as blizzards kept Americans away from auto dealers and limited traffic at malls, economists said before a report today.

Purchases dropped 0.2 percent after rising 0.5 percent in January, according to the median estimate of 77 economists surveyed by Bloomberg.

A report today from Reuters/University of Michigan may show the group’s preliminary consumer sentiment index for March probably rose to 74 from 73.6 last month, according to a separate survey. With assistance from Toru Fujioka, Masahiro Hidaka, Mayumi Otsuma and Hiroko Komiya in Tokyo and Ron Harui in Singapore.