Dollar Falls to Record Low Versus Euro as Bets on Fed Cut Mount

By Stanley White and Kosuke Goto

Oct. 26 (Bloomberg) -- The dollar fell to a record low against the euro on speculation a slowing U.S. economy and finance industry losses will prompt the Federal Reserve to lower interest rates on Oct. 31.

The dollar headed for a third weekly decline versus the single European currency after reports showed an unexpected drop in U.S. durable goods orders and a worsening slump in housing. American International Group Inc.'s shares yesterday fell the most since August on speculation the world's largest insurer will write down assets linked to subprime mortgages.

``The market is now building in the chance of further Fed cuts beyond next week, so from that perspective it is certainly very bearish for the dollar,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney.

The U.S. currency declined to an all-time low of $1.4364 per euro at 7:30 a.m. in London from $1.4324 late yesterday in New York. The dollar is down 0.4 percent against the euro this week. It has lost 8 percent this year. It will drop to $1.45 by year- end, Trinh forecast.

The dollar was at 114.42 yen, a 0.1 percent loss from Oct. 19, and fell as low as 91.25 cents against Australia's dollar, the weakest since May 1984, poised for a 2.4 percent weekly decline. It headed for a 2.5 percent loss against the New Zealand dollar.

Consumer Sentiment

A Reuters/University of Michigan index of consumer sentiment, due to be issued at 10 a.m. in New York, will probably confirm confidence was the weakest this month since August 2006.

Interest-rate futures traded on the Chicago Board of Trade show an 86 percent chance the Fed will lower its rate a quarter- percentage point to 4.50 percent on Oct. 31. The odds were 70 percent a week ago. Traders see a 14 percent chance of a half- point cut. The European Central bank kept its benchmark rate at 4 percent on Oct. 4.

The U.S. currency fell against the Singapore dollar to a 10- year low of S$1.4537, down 0.6 percent for the week. The worst housing slump in 16 years has deepened as the riskiest borrowers default on home loans at a record pace, causing losses at Wall Street firms.

``With the numbers of unsold houses rising, the U.S. won't be able to break out of its housing slump for one year,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This will depress consumer confidence, adversely affecting the real economy and the dollar,'' which may fall to 112 yen by year-end, he said.

Deflation, BOJ

The yen headed for a 2 percent decline against the Australian and New Zealand dollars this week after government data showed Japan's consumer prices fell for an eighth consecutive month, damping the outlook for an increase in interest rates.

Core consumer prices, which exclude fresh food, dropped 0.1 percent in September from a year earlier, matching economists' forecasts. Industrial production fell 1.4 percent in September from a month earlier, more than the median estimate for a 1.2 percent decline.

The end of Japan's battle to escape deflation has been ``delayed,'' Economic and Fiscal Policy Minister Hiroko Ota said at a briefing after the data.

The yen has fallen against 12 of the 16 most-active currencies in the past year as investors borrowed in Japan to purchase higher-yielding currencies in so-called carry trades. The Bank of Japan may leave its benchmark rate unchanged at 0.5 percent and lower its growth and inflation forecasts when it meets Oct. 31, according to economists.

``Weak consumer price numbers will encourage yen carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The BOJ may lower its forecasts next week, making it unreasonable to expect a rate hike soon.''

The yen traded at 164.24 against the euro, the lowest since Oct. 19, from 163.54 yesterday.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.