Oct. 31 (Bloomberg) -- The dollar fell to a record low against the euro on speculation the Federal Reserve will cut its benchmark interest rate today. The yen declined after the Bank of Japan left borrowing costs unchanged, spurring carry trades.

The dollar also traded at its weakest in 26 years versus the British pound before a government report that will probably show the U.S. economy grew at a slower pace in the third quarter. Futures traders are betting the Fed will cut interest rates today. The yen slipped against all of the 16 most-actively traded currencies as policy makers also lowered estimates for inflation and economic growth.

``The expectation of a rate cut from the Fed today is pushing the dollar lower and it seems like people are pouring money into the yen carry trade again,'' said Toshi Honda, a currency strategist in London a Mizuho Corporate Bank Ltd. ``The dollar's going to lose ground gradually against everything and the yen is going to remain just as weak.''

The U.S. currency traded at $1.4445 per euro as of 7:05 a.m. in New York, from $1.4432 yesterday, and reached $1.4467, the lowest since the European currency's debut in January 1999. It has fallen 1.3 percent this month.

The yen fell against the dollar to 115.08, from 114.63 yesterday, and to 166.32 per euro, from 165.46. It also slipped 0.6 percent against the British pound, to 238.51 yen.

The euro was supported after a report showed inflation in the euro region accelerated in October by more than economists forecast, sparking speculation the European Central Bank may raise its benchmark rate from 4 percent.

European Inflation

The inflation rate in the 13 nations sharing the euro rose to 2.6 percent, from 2.1 percent in September, the European Union's statistics office in Luxembourg said today. That was more than the 2.3 percent forecast in a Bloomberg survey.

Futures trading indicates the Fed will reduce its target rate a quarter-percentage point to 4.5 percent.

Against the pound, the U.S. currency fell to $2.0724, near the lowest since May 1981, before trading at $2.0721. The dollar index, which tracks the value of the currency against six major peers including the yen and the euro, fell to 76.62, the lowest since it was created in 1973.

``We don't think that the dollar weakness has run its course and will reverse,'' said Michael Klawitter, a currency analyst at Dresdner Kleinwort in Frankfurt who forecasts the U.S. currency may fall to as low as $1.50 by the end of March. ``A dovish Fed is going to keep pressure on the dollar.''

BOJ Decision

The Bank of Japan kept its benchmark rate at 0.5 percent, as forecast, the lowest among major industrialized nations. The revision lower of its economic forecasts fueled speculation the scope for rate increases is limited, prompting investors to buy higher-yielding assets funded with loans in Japan.

``The yen and the dollar are the weakest currencies nowadays because of their bearish rate outlook,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. in Tokyo. ``This is prompting investors to dump the yen and dollar and to buy bullish commodity currencies, namely the Australian and Canadian dollars.''

Bank of America Corp. and Mizuho Corporate Bank Ltd. cut their dollar forecasts. Bank of America, the second-largest U.S. bank, says the dollar will trade at $1.44 per euro by the end of 2007. Mizuho, Japan's second-largest publicly traded lender by assets, predicts $1.45. Their previous estimates were $1.42 and $1.40 respectively.

The dollar has fallen 8.7 percent against the euro this year, the worst performer among the 16 most-actively traded currencies, on signs the most severe housing slump in 16 years is slowing the economy.

U.S. Growth

U.S. consumer confidence fell this month to the weakest in two years and home prices dropped the most in at least six years, reports showed yesterday. U.S. gross domestic product, scheduled for release at 8:30 a.m. in Washington, probably grew an annualized 3.1 percent in the third quarter, slowing from 3.8 percent a quarter earlier, according to a Bloomberg News survey of economists.

The Fed cut its target rate for overnight lending between banks by 50 basis points on Sept. 18, the first reduction since 2003, to protect the economy from a housing recession.

Interest-rate futures traded on the Chicago Board of Trade show a 94 percent chance the Fed will lower borrowing costs today. The decision is due about 2:15 p.m. in Washington. The odds of a half-point reduction are 6 percent. The European Central Bank's rate is 4 percent.

``There's little doubt the Fed will cut rates later today, and it may do so again in December,'' said Hiroshi Yoshida, foreign-exchange trader at Shinkin Central Bank in Tokyo. ``The U.S. economy is going to weaken from here on, and that will push the dollar lower.''

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.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: October 31, 2007 07:24 EDT