May 8 (Bloomberg) -- The dollar fell to an eight-month low against the yen on speculation the Federal Reserve will pause soon in its almost two-year cycle of raising interest rates.

The Fed will increase its benchmark rate May 10 and then maintain it until at least August, the biggest bond-trading firms said in a survey. The yen led a rally by Asian currencies after Bank of Japan Governor Toshihiko Fukui said policy makers may increase borrowing costs on signs of ``sustained'' growth.

``Everybody's looking for an excuse to sell the dollar,'' said Jeremy Stretch, a currency strategist at Rabobank Groep in London.

The U.S. currency dropped to 111.50 yen at 11:23 a.m. in New York, from 112.58 on May 5. It reached 110.99, the weakest since Sept. 21 last year. Trading in Japan resumed after a three-day holiday. The dollar traded at $1.2723 per euro from $1.2727, the first increase in five days. Earlier, it dropped to $1.2787, the lowest since May 12, 2005.

Technical indicators that traders use to predict momentum reached levels signaling a change in direction for the dollar. The euro's 14-day relative strength index against the dollar, a measure of momentum, was 76.4 on May 5, the highest since December 2004. A level below 30 or above 70 signals a change in direction. It has been above 70 since April 27.

``The dollar move was clearly overextended'' against the euro, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.

`More Room to Go'

A Bloomberg survey on May 5 showed that 65 percent of 51 traders, strategists and investors surveyed from Sydney to New York advised buying the yen against the dollar. Sixty-one percent recommended buying Europe's common currency against the dollar.

``There's still more room to go, particularly against the yen,'' said Daniel Katzive, a currency strategist at UBS Securities LLC in Stamford, Connecticut. UBS is forecasting the dollar will fall to $1.30 per euro and 108 yen in the next three months, Katzive said.

Economists at 17 of the 22 securities firms that trade with the Fed, known as primary dealers, said last week that policy makers at the U.S. central bank will lift their target rate on May 10 for the last time until at least August.

The U.S. currency is down 7.2 percent against the euro and 5.5 percent versus the yen this year on anticipation borrowing costs in Europe and Japan will rise faster than those in the U.S.

Fukui Comments

The Fed has raised its target rate 15 times since June 2004 to 4.75 percent, while the ECB has lifted borrowing costs twice since the start of December, to 2.5 percent. The BOJ has held rates near zero percent since 2001.

Japan's currency has risen this year as the nation heads for its longest run of quarterly growth in five years. The South Korean won, Thai baht and Taiwan dollar also rallied today on speculation faster growth in Asia will lure investors.

``Investors have jumped back into the idea of BOJ rates moving up sooner, and so they've bought the yen,'' said Antje Praefcke, a currency strategist at Commerzbank AG in Frankfurt.

Fukui said on May 7 at a meeting of central bankers in Basel, Switzerland, that Japan is ``completely on track for a sustained recovery.'' He added policy makers are ``quite open to the next step'' on rates, though ``we don't have any predetermined plans.''

The BOJ on March 9 ended a five-year policy of flooding the economy with money to fight deflation, a prelude to raising rates. Seven of 16 economists Bloomberg surveyed last month said the bank may raise its benchmark as early as July.

The yield advantage of U.S. debt have narrowed. The extra yield of benchmark U.S. 10-year notes over German bonds dropped 7 basis points last week from a six-month high of 1.19 percentage points on May 1. The spread over Japanese debt of a similar maturity narrowed 13 basis points to 3.12 percentage points.

Buffett's Bet

Billionaire investor Warren Buffett said he cut his foreign currency investments because there are better ways to hedge against a decline in the dollar. Buffett, chief executive officer of Berkshire Hathaway Inc., told investors at the company's annual meeting on May 6 in Omaha, Nebraska, that the $4 billion purchase of most of Israel-based toolmaker Iscar Metalworking Cos. represents a way of ``mitigating'' a fall in the dollar.

Buffett who reduced his bet against the dollar in the first quarter to $5.4 billion from $13.8 billion in December, said Iscar gets most of its earnings in currencies other than the dollar. Buffett has been betting the U.S. current account deficit would hurt the currency since 2002.

To contact the reporter on this story: Kabir Chibber in London at kchibber@bloomberg.net .