NEW YORK (Bloomberg) - Ben Bernanke's decision to lower interest rates 1.25 percentage points last month will end the dollar's two-year slide, according to the world's biggest currency traders.

For the first time since 2003, investors are focused on relative growth prospects rather than absolute borrowing costs, according to Geoffrey Yu, a London-based strategist with UBS AG, the No.2 trader. The steepest cuts by a Federal Reserve chairman in seven years will support economic growth in the US as Europe slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg tracks. The dollar will gain at least nine percent against the euro this year, UBS and BNP predict.

"We're not chasing dollar weakness any lower," said Robert Robis, a fixed-income manager in New York at OppenheimerFunds Inc., which oversees $260 billion. "The Fed's actions have avoided a long recession and we may start to see a recovery later this year."

Robis has reduced the share of euro-denominated assets versus those linked to the dollar in his $9 billion portfolio. It now holds less than the benchmark index because he expects the US currency to outperform. As recently as November, he was "overweight" the euro against the dollar.

Futures traders cut the value of contracts benefiting from a drop in the dollar to $13.9 billion as of January 29, according to Charlotte, North Carolina-based Bank of America Corp., the second-largest US bank by assets. That's down from a record $32.3 billion in November.

The dollar has gained 1.1 percent versus the euro to $1.4802 since sinking to an all-time low of $1.4967 on November 23. The currency appreciated even as the yield advantage on a two-year German bund more than doubled to 1.3 percentage points over a comparable Treasury note, making bunds more appealing to international investors. The last time the spread was so large was 2002, when the euro surged 18 percent against the dollar.

Paris-based BNP, the most accurate of 31 firms surveyed about their currency predictions for the second half of 2007, is among the most bullish on the dollar in 2008 with its forecast of $1.36 per euro by year end. Zurich-based UBS predicts $1.35. The median estimate calls for a 5.4 percent increase to $1.40 by the end of this year and a six percent gain to $1.32 in 2009. The dollar weakened 10.6 percent in 2007 and 11.4 percent in 2006 after strengthening 12.6 percent in 2005.

While two Fed cuts slashed the target rate for overnight loans between banks to three percent in nine days, the European Central Bank (ECB) kept its benchmark rate unchanged at a seven-year high of four percent in an attempt to curb inflation. The ECB will keep rates unchanged at its February 7 meeting, according to all 55 economists surveyed by Bloomberg News.

"If aggressive cuts by the Fed can stimulate the economy, then the US will definitely lead the way in terms of economic recovery," Mr. Yu said. "The ECB is behind the curve, so it's time to move back" into the dollar, he said.

Deutsche Bank AG, the world's largest currency trader, predicts an eight percent gain in the dollar this year as the euro- zone economy expands 1.6 percent, lagging behind the 1.9 percent growth projected for the US. For 2009, Frankfurt-based Deutsche Bank puts growth at 2.6 percent in the US and 1.9 percent in Europe.

Maxime Tessier, head of foreign exchange at Caisse de Depot et Placement in Montreal, is not counting on Mr. Bernanke. It may be too late for lower borrowing costs to keep the US out of a recession, he said. The Labour Department said on February 1 that payrolls fell by 17,000 in January, the first decline since August 2003.

"From our vantage point it doesn't look very good and every week we re-evaluate the US economy, it has deteriorated," said Tessier, whose firm manages $143 billion. "It's too early to position your portfolio for a dollar rebound because a month from now the currency could be in rally mode, but it could also be a lot lower."

The US is entering the "worst consumer recession since 1980," and the dollar will fall to $1.57 by the end of March before recovering to its current $1.48 by year end, according to David Rosenberg, chief economist for North America in New York at Merrill Lynch & Co. The firm is the world's largest brokerage.

The dollar has benefited from Fed rate cuts before. During the first six months of 2001, the currency gained 10 percent against the euro as the central bank slashed its target 2.75 percentage points to below the ECB's benchmark refinance rate following the bursting of the technology bubble.

"We still believe the US promises good returns," Sultan bin Sulayem, the chairman of state-owned investment group Dubai World, said on January 25 at the World Economic Forum in Davos, Switzerland. Dubai World agreed in August to invest as much as $5.1 billion in Kirk Kerkorian's Las Vegas-based casino group MGM Mirage.

Middle Eastern and Asian investors have poured up to $39 billion into US banks since August, according to Bloomberg calculations. Foreign holdings of US securities rose a net $149.9 billion in November, the most in 22 months, the Treasury Department said last month in Washington. In October, the gain was $92.2 billion.

Investors say there are encouraging signs that business investment will hold up. Last week the House and Senate Finance Committees approved a fiscal stimulus package of as much as $157 billion proposed by President George Bush. The same day the Labour Department said the economy was shedding jobs, the Institute for Supply Management said its manufacturing index rose in January.

"A lot of the people are finding this is a good time to get back in the dollar," said Scott Ainsbury, a money manager who helps oversee $12 billion in currencies at FX Concepts Inc., a New York-based hedge fund.