Oct. 29 (Bloomberg) -- The dollar fell to a record low against the euro on speculation the Federal Reserve will cut interest rates this week to prevent the worst U.S. housing slump in 16 years from slowing the economy.

The U.S. currency slid to its weakest in 33 years versus the Canadian dollar and a 23-year low against Australia's dollar. Yields on two-year Treasuries are now the lowest among bonds of the Group of Seven nations excluding Japan after traders raised bets the Fed will reduce rates on Oct. 31. The yen weakened against all but one of the 16 most-traded currencies as gains in stocks spurred so-called carry trades.

``Dollar weakness is going to continue,'' said Hans-Guenter Redeker, head of currency strategy at BNP Paribas SA in London. ``What's driving the market is interest-rate and yield differentials, which are supportive of other currencies against the dollar.''

The dollar dropped to as low as $1.4438 per euro, the weakest since the introduction of the European common currency in 1999, before trading at $1.4412 as of 7:44 a.m. in New York, from $1.4393 in New York on Oct. 26. It may drop to $1.50 by the end of the year, Redeker forecast.

The dollar's 8.5 percent loss against the euro since the start of the year has prompted French President Nicolas Sarkozy to warn that exports from the $10 trillion euro-region economy may suffer. By contrast, the cheaper dollar has buoyed U.S. shipments overseas. The nation's trade deficit in August narrowed to $57.6 billion, the least since January, the Commerce Department said Oct. 11.

Carry-Trade Favorites

The yen declined the most against the New Zealand and Australian dollars and also fell versus the dollar, euro and the U.K. pound as rallying stocks prompted investors to buy higher- yielding assets financed by loans in Japan.

Against the euro, Japan's currency dropped to as low as 165.40, the weakest in almost two weeks, from 164.34 at the end of last week. It weakened to 114.74 per dollar, from 114.19.

The yen dropped as much as 1.1 percent to 88.46 versus the New Zealand dollar and slipped to 105.95 per Australia's dollar, the weakest since Oct. 15. It declined 1 percent against the U.K. pound, to 236.46.

``A rise in stock prices means improvement in investors' risk appetite,'' said Junya Tanase, a currency strategist at JPMorgan Chase & Co. in Tokyo. ``Should stocks continue to advance, the yen will remain weak.''

Global Stocks

Stocks in Europe and Asia advanced, and U.S. stock futures also climbed. The Morgan Stanley Capital International World Index added 0.6 percent to 1,669.06, while Standard & Poor's 500 Index futures rose 0.4 percent to 1,548.30.

The Bank of Japan will keep the benchmark overnight lending rate on hold at 0.5 percent on Oct. 31, the lowest in the Group of Seven nations, according to all 44 economists surveyed by Bloomberg.

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.

The dollar's drop also helped drive crude oil to a record and gold prices to the highest since January 1980, encouraging investors to buy assets in commodity-producing nations.

``We will start to see some of these Middle Eastern countries, large holders of U.S. dollar funds, start to look at other alternative investments to seek higher returns,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney.

Turkish Incursion

The dollar also weakened on concern rising oil prices will hamper the U.S. economy, the world's biggest oil importer. Oil rose to a record $93.20 a barrel in after-hours electronic trading on the New York Mercantile Exchange as a storm in the Gulf of Mexico caused production shutdowns.

The dollar fell against 14 of the 16 most-actively traded currencies. It slid as far as 77.39 U.S. cents versus New Zealand's dollar, the weakest since Oct. 15, and as low as 92.72 U.S. cents against Australia's dollar, the weakest since May 1984. It also declined to $1.0441 against the Canadian dollar, the weakest since 1974, recently trading at $1.0422.

The spread, or difference in yield, between two-year U.S. Treasuries and Japanese bonds was at 3.03 percentage points, near the least since December 2004. The extra yield similar German notes pay over U.S. debt was at 0.16 percentage point, near the highest since September 2004.

Rate Speculation

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its target rate overnight bank loans a quarter-percentage point to 4.50 percent this week. Futures show 8 percent odds of a half-point reduction on Oct. 31.

The European Central Bank will keep its key rate at 4 percent at a Nov. 8 meeting, according to the median forecast in a Bloomberg News survey. The Reserve Bank of Australia will increase its rate a quarter-point to 6.75 percent on Nov. 7, a separate survey shows. New Zealand's central bank held its benchmark at 8.25 percent last week.

The Chinese yuan rose 0.2 percent to 7.4763 after the People's Bank of China set the strongest daily reference rate since the end of a fixed exchange rate in July 2005.

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 29, 2007 07:52 EDT