Nov. 8 (Bloomberg) -- The dollar traded near a record low versus the euro and the weakest since 1981 against the pound on speculation European central banks may signal higher interest rates while expectations rise for lower U.S. borrowing costs.

The European Central Bank and Bank of England are forecast to keep their borrowing costs unchanged at their meetings today, according to Bloomberg News surveys. Federal Reserve Chairman Ben S. Bernanke will testify on the U.S. economic outlook before Congress in Washington.

``The bias is still for higher rates from the ECB as there are inflation issues in euro zone,'' said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. ``The interest-rate differential continues to move in favor of the euro against the dollar.''

The U.S. currency traded at $1.4633 per euro, $2.1020 per pound and 112.56 yen at 7 a.m. in Tokyo. The dollar dropped to $1.4731 per euro yesterday, the cheapest level since the 13- nation currency started trading in January 1999, and touched $2.0172 per pound, the weakest since May 1981.

The dollar has dropped against all 16 most-actively traded currencies this year, losing 10 percent against the euro, 6.9 percent versus the pound and 5.2 percent against the yen.

The ECB will keep its key rate at 4 percent, while the BOE may hold borrowing costs at 5.75 percent, according to surveys from Bloomberg News. The Fed cut its target of overnight lending rate between banks to 4.5 percent last week, the second reduction since September, and interest-rate futures show 70 percent odds the central bank will cut again in December.

Trichet's Press Conference

The ECB President Jean-Claude Trichet is scheduled to hold a press conference following the rate decision. The Frankfurt- based central bank shelved a planned rate increase in September to assess the economic impact of the U.S. housing slump.

Rising oil and food prices have pushed inflation in euro zone to 2.6 percent, the highest since September 2005, a report showed last month. Oil climbed above $98 a barrel for the first time yesterday.

``The recent surprise'' in consumer prices suggested the ECB ``may strike a somewhat hawkish chord,'' which will help extend the euro's gain, wrote currency strategists from Citigroup Inc., led by Tom Fitzpatrick, global head of currency strategy, in a research note yesterday.

The yield advantage of two-year German bund over comparable maturity Treasuries widened to 0.33 percentage point yesterday, the widest since April 2004. A widening spread boosts the allure of European debt relative to that in the U.S.

Dollar Drops

The dollar dropped to the lowest against a basket of six major currencies yesterday after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The U.S. dollar also declined to the cheapest versus the Canadian dollar since the end of a fixed exchange rate in 1950 and a 23-year low against the Australian dollar. The Dollar Index traded on ICE Futures U.S. in New York dropped to 75.077, the weakest since the gauge started in March 1973.

Credit Suisse Group revised its dollar forecasts yesterday, expecting the U.S. currency to fall to $1.51 per euro in three months compared with a previous prediction of $1.45. The dollar will weaken to 111 yen compared with a previous forecast of 121 yen, according to a research note sent to clients yesterday.

Yen Rallies

The yen rose against all 16 most-actively traded currencies yesterday as declines in U.S. and European stocks prompted investors to trim higher-yielding investments funded by loans in Japan. The Standard & Poor's 500 index fell 2.9 percent after New York state expanded a probe of collusion in the home-loan industry, General Motors Corp. posted a record loss and the dollar tumbled.

The yen gained 1.1 percent yesterday against the euro to 165.14. The Japanese currency also advanced 1.9 percent against the New Zealand dollar and 1.8 percent versus the Australian dollar.

Volatility on one-month dollar-yen options rose to 11.56 percent yesterday, the highest since September. The volatility touched 23 percent on Aug. 17, the highest since Bloomberg started to track the data in January 1999.

Higher volatility may discourage carry trades because it implies the bets will be exposed to bigger exchange-rate fluctuation.

In carry trades, investors borrow money in markets such as Japan, where the central bank's key lending rate is 0.5 percent, to buy assets in countries including New Zealand, where interest rate is 8.25 percent.

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

Last Updated: November 7, 2007 17:09 EST