Oct. 12 (Bloomberg) -- The dollar headed for a weekly decline against the euro on speculation the Federal Reserve will cut interest rates to bolster economic growth, while the European Central Bank stays on hold, reducing the attractiveness of U.S. fixed-income assets.

The dollar fell to within a cent of an all-time low against the single currency before a U.S. retail sales report that may show the housing slowdown is weighing on consumer demand. The euro also headed for a fifth week of gains against the yen after ECB policy maker Axel Weber said late yesterday borrowing costs may need to be raised to a ``restrictive'' level to combat inflation.

``The U.S. economy is weakening and the Fed is going to cut rates by the end of October, and we assume another rate cut by the end of the year,'' said Hans Guenter Redeker, head of currency strategy at BNP Paribas SA in London and the most accurate foreign-exchange forecaster in the third quarter in a Bloomberg survey. ``Rate differentials are still driving the market.''

The dollar traded at $1.4176 per euro at 11:22 a.m. in London from $1.4196 in New York yesterday, a decline of 0.3 percent this week. The U.S. currency fell to $1.4283 on Oct. 1, the lowest since the European currency's debut in January 1999. It will fall to $1.46 by the end of the year, said Redeker.

There may be an ``additional need'' to raise interest rates, given the ``expected acceleration in euro-region inflation,'' Weber, who also heads Germany's Bundesbank, said in the text of a speech in Munich.

ECB Speakers

Fellow ECB policy maker Nicholas Garganas said inflation is ``likely'' to top the bank's 2 percent limit next year, Dow Jones newswire reported citing an interview.

The ECB held its key rate at 4 percent last week, saying it needed to assess the economic effect of rising global credit costs and the U.S. housing slump. Central bank council member Klaus Liebscher also said the euro's gains are cushioning the impact of soaring oil prices.

The Commerce Department will report today that retail sales rose 0.2 percent in September from 0.3 percent last month, according to a Bloomberg News survey of economists. A separate report may show higher energy costs pushed up wholesale prices.

``There's a worry the U.S. economy will slide into recession,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``Weber's remark suggesting further rate increases was unexpected, buoying the euro.''

Carry Trade

The U.S. currency fell for a fifth week against New Zealand's dollar to 77.16 U.S. cents after sliding to an 11-week low of 77.49 cents yesterday, as the Fed's Sept. 18 half- percentage point rate cut boosted the allure of higher-yielding currencies.

The yen has dropped against the 16 most-active currencies this month, and is headed for its longest run of weekly declines against the euro since May, as investors borrowed it to buy higher-yielding assets. The Bank of Japan yesterday kept rates at 0.5 percent, the lowest among the world's major economies.

The yen fell to 166.53 per euro from 165.38 a week ago.

``The Bank of Japan will be unable to raise rates any time soon,'' said Masashi Kurabe, senior manager of the foreign- exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``With rates low, the yen carry trade will prevail.''

Japan's currency may fall to 118 per dollar and 167.50 a euro today, Kurabe said.

In carry trades, investors borrow in low interest-rate countries, such as Japan, to buy assets in nations such as New Zealand, where borrowing costs are 8.25 percent, or Australia, where rates are 6.5 percent. The risk is that currency fluctuations erase any profit from the difference in rates.

One-month implied volatility for the yen fell to 7.63 percent today from 9.05 percent a week ago. Lower volatility may encourage carry trades, as it signals smaller exchange-rate fluctuation risk.

Japanese investors bought 597.5 billion yen ($5.1 billion) in overseas bonds and notes during the week ended Oct. 6, according to Ministry of Finance data released in Tokyo today. They have been net buyers for three straight weeks.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: October 12, 2007 07:22 EDT