Sept. 28 (Bloomberg) -- The dollar fell to a record low against the euro for a seventh straight day as slowing inflation encouraged traders to speculate that the Federal Reserve will cut borrowing costs a second time this year.

The U.S. currency weakened to $1.42 per euro for the first time since the 13-nation currency debuted in 1999 after a government report today showed core consumer prices last month had their smallest annual gain since February 2004. Former Fed Chairman Alan Greenspan said the chance of a U.S. recession is higher now than a few months ago.

``Continued dollar weakness probably is still in the cards,'' said Ihab Salib, who helps oversee $3 billion in international bonds in Pittsburgh at Federated Investments Inc. ``I expect another 3 to 5 percent depreciation in the dollar against major currencies including the euro and yen over the next two to three years.''

The dollar fell 0.8 percent to $1.4262 per euro at 4:14 p.m. in New York after touching the all-time low of $1.4278. The dollar decreased 0.7 percent to 114.86 yen and 0.9 percent to $2.0463 per pound and touched a 31-year low of $1.0087 against Canada's dollar. The yen was little changed at 163.82 per euro.

The New York Board of Trade's dollar index touched the weakest since the gauge began in 1973. The Fed's trade-weighted index comparing the dollar with major currencies dropped on Sept. 25 to the lowest since its inception in 1971.

The U.S. dollar has fallen against all but two of the 16 most actively traded currencies this quarter, depreciating 5.3 percent against the euro and 7.3 percent versus the yen. For the year, the dollar has lost 8.1 percent against the euro and 3.8 percent versus the yen.

Stop-Loss Orders

The euro's gains accelerated after it broke $1.4250, where investors had placed preset orders to buy the European currency, said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. Investors usually place the so-called stop-loss orders in case the market moves against their bets.

The next level of resistance is $1.4536 per euro, equivalent to the dollar's record low of 1.3455 deutsche marks in March 1995, according to Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.

The Fed on Sept. 18 reduced the target rate for overnight lending between banks a half-percentage point to 4.75 percent to prevent the housing slump from weakening the economy.

Futures contracts today showed 86 percent odds the central bank will cut its target to 4.50 percent at its next meeting Oct. 31, compared with a 14 percent likelihood a month ago. The European Central Bank's key borrowing cost is 4 percent, while the Bank of Japan's is 0.5 percent.

Greenspan's Assessment

Greenspan said in an interview with BBC Radio 4 today that the odds of a U.S. recession are ``less than 50-50.'' He said in March the odds were about one in three.

``The danger of recession has obviously risen,'' he said.

The Commerce Department said today that its price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 1.8 percent from August 2006 after a 1.9 percent annualized increase the previous month.

Confidence among U.S. consumers remained at the lowest level in a year in September. The Reuters/University of Michigan final index of consumer sentiment was unchanged at 83.4, the lowest since August 2006.

``The dollar was sold on a significantly bearish outlook for the U.S. economy and expectation for Fed rate cuts,'' said Robert Sinche, head of global currency strategy in New York at Bank of America Corp. ``Now the dollar has been pushed to an extreme level.''

Exchange Reserves

The U.S. dollar's share of global foreign-exchange reserves fell to 64.8 percent from 64.9 percent in the second quarter, the International Monetary Fund said. The euro's share of reserves rose to 25.6 percent from 25.5 percent, and the yen's share fell to 2.8 percent from 3 percent, the Washington-based fund said.

The weaker dollar has helped U.S. exporters including Boeing Co., General Electric Co. and Deere & Co. ship more airplanes, engines and tractors overseas. The trade deficit narrowed to $59.2 billion in July from a revised $59.4 billion during June, the Commerce Department said Sept. 11.

Gold rallied today to the highest since January 1980, while crude oil rose above $83 a barrel.

The dollar will rise to $1.40 against the euro by year-end, according to the median of 47 analyst forecasts compiled by Bloomberg News.

The yen appreciated earlier against the dollar on speculation losses related to subprime mortgage defaults will spread in the U.S. and Europe.

The Financial Times said Northern Rock Plc, a U.K. bank bailed out by the Bank of England, borrowed a further 5 billion pounds ($10 billion) to stay in business. The Bank of England agreed to bail out Newcastle, England-based Northern Rock on Sept. 14 after it requested an emergency credit line.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net

Last Updated: September 28, 2007 16:16 EDT