(Bloomberg) -- The dollar may extend its decline against the euro as a jump in U.S. consumer confidence in April reduced demand for the relative safety of the greenback.

Mexico’s peso rose from the weakest level in almost four weeks yesterday on speculation the government will contain the swine flu outbreak and limit its impact on an already faltering economy. The dollar weakened before a report forecast to show U.S. gross domestic product shrank at a slower pace in the first quarter and the Federal Reserve’s decision on monetary policy.

“The U.S. economy is not falling as fast as last year, which is a good thing,” said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, with $11.3 trillion in assets under custody. “Institutional investors have unwound long dollar positions even though they haven’t gone outright short. The market lacks direction at the moment.” A long position is a bet an asset will appreciate.

The dollar traded at $1.3149 per euro at 6:05 a.m. in Tokyo, after falling 0.9 percent yesterday. The euro was at 126.78 yen, following a 0.5 percent gain. The U.S. currency was at 96.43 yen after falling 0.3 percent.

Mexico’s peso increased 1.6 percent to 13.80 per dollar yesterday after earlier declining to 14.1382, the weakest level since April 1, and plunging 5.1 percent on April 27.

Mexico City will close all 35,000 restaurants through May 5 to prevent the spread of the swine flu. As many as 152 people have died in Mexico from flu-related causes, and the number of worldwide cases of the virus confirmed by laboratory tests reached 73, officials said.

Spread of Flu

The spread of the swine flu beyond Mexico prompted the World Health Organization to increase its global pandemic alert to the highest since it adopted the warning system in 2005.

The dollar dropped yesterday against the euro on reduced haven demand as the New York-based Conference Board’s consumer confidence index climbed this month to 39.2, the highest level since November, from 26.9 in March. The gain in the index was the biggest since 2005.

“A slower rate of economic decline continues to play out,” said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago. “Risk is being put back on, and the euro rallied a bit.”

The U.S. economy probably contracted at an annual rate of 4.7 percent in the first quarter after shrinking 6.3 percent in the final three months of 2008, according to the median forecast of 71 economists surveyed by Bloomberg. The Commerce Department is due to release the report at 8:30 a.m. in Washington.

Fed’s Decision

The Fed will keep its target lending rate in a range of zero to 0.25 percent, according to a separate Bloomberg survey of 43 economists. Policy makers will announce the decision on borrowing costs and goals for purchases of Treasuries and mortgage securities at 2:15 p.m. in Washington.

European Central Bank policy makers may cut the 1.25 percent target lending rate at their next meeting on May 7 and signal they may pump additional money into the economy to push down borrowing costs.

“The ECB doesn’t like to shock and surprise,” said Steven Barrow, head of Group of 10 currency research in London at Standard Bank Plc. “We may get a buy the rumor, sell the fact response and see the market buy the euro when the ECB doesn’t do anything as negative as the market feared.”

The euro may decline to as low as 121.75 yen after breaking through a resistance level of 124.75 early yesterday, according to analysis of Fibonacci numbers, Societe Generale said in a research note.

The levels represent 50 percent and 38.2 percent retracements of a rally that started at 112.12 yen on Jan. 21 and ended at 124.98 on April 6, the bank said.

Currency Retracement

“We expect euro-yen to break below the Fibonacci retracement of 124.75, currently tested, which is the last major support on the way to the 121.75-80 region,” technical analysts including Hughes Naka in Paris wrote.

Support and resistance refer to the bottom and top boundaries of a trading range, where buy and sell orders are typically clustered. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net