April 20 (Bloomberg) -- The euro sank the most in a week versus the dollar and yen after German investor confidence fell, and before Federal Reserve Chairman Alan Greenspan gives testimony that may signal prospects for interest rates.

Traders sold euros after the ZEW Center for European Economic Research's index of investor sentiment for this month fell to the lowest since July, keeping alive speculation the European Central Bank will cut borrowing costs in coming months.

``The market continues to be very vulnerable to evidence of weakness in Europe,'' said John Rothfield, senior currency strategist in San Francisco at Bank of America Corp., the No. 2 U.S. bank. ``The debate about whether the ECB would ease rates is still on. That's going to continue to weigh on the euro.''

Europe's common currency fell to $1.1894 at 9:25 a.m. from $1.2020 yesterday, according to EBS, an electronic foreign- exchange dealing system. It dropped to 128.83 yen from 130.30.

The U.S. currency extended its gains after Federal Reserve Bank of Dallas President Robert McTeer said March's rise in consumer prices was ``disturbing.''

``We have seen the whites of one eye of inflation,'' McTeer said in an interview on CNN/fn. ``We're waiting for two. But yes, patience is running out.''

Greenspan speaks to the Senate Banking Committee at 2:30 p.m. Washington time today and the Joint Economic Committee at 10 a.m. tomorrow. Speculation the ECB will cut rates and the Fed will raise them is giving investors more reasons to hold dollars. The European Central Bank's key interest rate is 2 percent, twice the Fed's overnight lending rate.

Yield Advantage

The ZEW sentiment index declined to 49.7 in April from 57.6 in March, bigger than the drop to 57.0 forecast by the median of 35 economists surveyed by Bloomberg News.

``As long as France and Germany don't grow strongly together, things will improve only slowly in the euro region,'' ECB Chief Economist Otmar Issing said late yesterday in an interview with German broadcaster ZDF. The recovery will ``improve gradually,'' he said, and a rebound in the region's job market will come ``not before the second half of 2004.''

A reduction in the European rate would undercut the yield advantage offered on debt denominated in euros compared with dollar-denominated securities.

``It will be difficult for the ECB to damp expectations'' of a rate cut ``in the wake of weaker data, with even Issing stating that he expects a still-cautious recovery,'' said Mitul Kotecha, chief global currency strategist at Credit Agricole Indosuez in London.

Greenspan

Economic reports this month have showed U.S. job growth and retail sales accelerating. Yesterday's U.S. Conference Board index of leading economic indicators had the biggest year-on-year gain in two decades.

``Greenspan may give some indication of when they are going to increase rates,'' said Timothy Mazanec, senior currency strategist in Boston at Investors Bank & Trust Co., custodian for $1.1 trillion of investor assets.

``If he comes out today and says the U.S. economy is picking up and inflation is more at a sustained level and could become a problem in the future, that's more of an indication that a rate increase is a matter of when and not if.'' The euro will fall to $1.18 by the end of June, Mazanec said.

September Eurodollar futures yielded about 1.595 percent. The futures settle at the three-month London interbank offered rate, or Libor, which has averaged about 23 basis points more than the Fed's target in the past 10 years.

Yield Differential

Yields on the 10-year U.S. Treasury note have risen about a half-percentage point this month after increases in consumer prices, retail sales and employment boosted speculation the Fed will raise its benchmark rate as soon as September.

The yield on the U.S. Treasury 4 percent note due in February 2014 was 4.40 percent. Germany's 4 1/4 percent German bond maturing in January 2014 yielded 4.16 percent.

The U.S. currency rose against 12 of its 16 most-traded counterparts, including the euro, the British pound, and the Swiss franc.

``The market is really looking for some definitive signs from the Fed chairman as to the path of future interest rates,'' said Kamal Sharma, currency strategist in London at Dresdner Kleinwort Wasserstein. ``Obviously the market would like a hawkish statement coming out from Greenspan -- we doubt that that's actually going to happen.''

To contact the reporter on this story: Mark Tannenbaum in New York mtannen@bloomberg.net. John Beresford-Peirse in London jbpeirse@bloomberg.net.

Last Updated: April 20, 2004 09:31 EDT