Oct. 1 (Bloomberg) -- The dollar traded near an all-time low against the euro on speculation a U.S. report today will show factories expanded at the slowest pace in six months.

The U.S. currency last month declined the most versus the euro in almost four years as traders increased bets the Federal Reserve will cut interest rates for a second time in October to revive the ailing economy. The yen was little changed after the Bank of Japan's quarterly Tankan survey showed sentiment among large manufacturers was unchanged.

``With a housing slump adversely affecting the whole situation, the U.S. economy will probably enter a recessionary phase in the first quarter,'' said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co. ``The dollar will head further south.''

The dollar traded at $1.4271 against the euro as of 10:48 a.m. in Tokyo, compared with $1.4267 on Sept. 28 and a record low of $1.4283. The U.S. currency was at 114.85 yen from 114.81 yen.

In the third quarter the U.S. currency fell 6.8 percent against the yen, the biggest drop since the three-month period ended September 2003 It may weaken to 105 yen by year-end, Mizuno forecast.

The Institute for Supply Management's factory index fell to 52.5, a six-month low, from 52.9 in August, the Tempe, Arizona- based group may report today, according to a Bloomberg News survey. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of U.S. gross domestic product.

Two Fed Cuts

Interest-rate futures show traders expect quarter-percentage point rate cuts at the Fed's next two monetary policy meetings on Oct. 31 and Dec. 11. They assign an 84 percent probability of a quarter-point reduction this month and 62 percent odds of an additional quarter-point move in December.

The yen was little changed versus the dollar and euro after the Tankan survey showed sentiment among Japan's largest manufacturers unexpectedly held near a two-year high of 23 last quarter.

``The report's impact on the yen is negligible, as there's a market consensus that the economy is weak,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The BOJ might not hike rates this year.''

Japan's currency traded at 163.85 per euro, after reaching 164, the highest since Aug. 9, from 163.79 on Sept. 28 in New York. It may trade between 114.60 and 115.10 against the dollar today, Muramatsu said.

Carry Trades

The yen last month fell against 15 of the 16 most-active currencies after a report Sept. 28 showed Japan's consumer prices dropped for a seventh month. The central bank's benchmark borrowing cost of 0.50 percent is the lowest in the industrialized world, encouraging local investors to seek higher yields overseas.

Investors saw 7 percent odds the BOJ will increase borrowing costs at the next meeting on Oct. 10-11, according to calculations by Credit Suisse Group based on the exchange of interest payments.

One-month implied volatility for the yen rose to 9.5 percent, from 9.25 percent on Sept. 28. Higher volatility may discourage carry trades, as it implies greater exchange-rate fluctuation risk.

In carry trades, 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 moves erase those profits.

ECB's Trichet

The euro may extend gains against the dollar on speculation European Central Bank President Jean-Claude Trichet will leave the door open to higher interest rates after a policy meeting Oct. 4.

The ECB will keep borrowing costs on hold at 4 percent this week, according to a Bloomberg survey. The euro has gained 21 percent against the dollar since the ECB raised rates eight times, starting in December 2005. Trichet is scheduled to give a speech later today in Malta.

Benchmark 10-year German bund yields touched a six-week high last week after inflation in Germany, the euro-region's largest economy, quickened to the highest rate in more than six years.

``The monetary policy outlook will benefit the euro,'' said Xinyi Lu, chief strategist of the international treasury division in Tokyo at Mizuho Corporate Bank Ltd. ``Trichet is in no position to say rates don't need to rise further. The inflation outlook simply wouldn't justify it.''

The euro may rise to $1.43 this week, he said.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.

Last Updated: September 30, 2007 21:51 EDT