Oct. 26 (Bloomberg) -- The dollar traded near a record low against the euro on speculation signs of a slowing U.S. economy will prompt the Federal Reserve to lower interest rates.

The dollar headed for a third weekly loss against the common European currency after an unexpected decline in durable goods and higher-than-forecast jobless claims fueled bets the U.S. central bank will cut interest rates by at least a quarter- percentage point at a policy meeting next week.

``The market is now building in the chance of further Fed cuts beyond next week, so from that perspective it is certainly very bearish for the dollar,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney.

The U.S. currency traded at $1.4328 per euro at 9:51 a.m. in Tokyo from $1.4324 late yesterday in New York. The dollar is headed for a 0.2 percent decline against the euro this week. It has lost 7.8 percent this year and touched $1.4348 per euro on Oct. 22, the lowest since the single currency's debut in January 1999. It will decline to $1.45 per euro by year-end, Trinh said.

The dollar last traded at 114.18 yen, down 0.3 percent from Oct. 19. It fell as low as 90.97 cents against Australia's dollar, the weakest since May 1984, before trading at 90.94, poised for a 2.2 percent weekly decline. It headed for a 2 percent loss against the New Zealand dollar.

The U.S. currency also fell against the Singapore dollar to a 10-year low of S$1.4537, down 0.6 percent for the week.

Consumer Sentiment

The Reuters/University of Michigan index of consumer sentiment will probably confirm that confidence fell this month to the lowest since August 2006. The index's final reading for October will be 82.0, matching the preliminary report on Oct. 12, from 83.4 in September, according to a Bloomberg News poll. The report is scheduled for release at 10 a.m. New York time.

The Fed cut its target rate for overnight loans between banks by a half-percentage point to 4.75 percent on Sept. 18 amid concern a housing slump will derail economic growth. The European Central bank kept its benchmark rate at 4 percent on Oct. 4.

Interest-rate futures traded on the Chicago Board of Trade show an 86 percent chance the Fed will lower its rate another quarter-percentage point on Oct. 31. The odds were 70 percent a week ago. Traders see a 14 percent chance the Fed will cut rates to 4.25 percent this month. A week ago, traders saw no chance of a half-point rate reduction this month.

``With the numbers of unsold houses rising, the U.S. won't be able to break out of its housing slump for one year,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This will depress consumer confidence, adversely affecting the real economy and the dollar,'' which may fall to 112 yen by year-end, he said.

Deflation

The yen's advance against the dollar may be limited after data showed Japan's consumer prices fell for an eighth consecutive month, damping expectations for an increase in interest rates.

Core consumer prices, which exclude fresh food, dropped 0.1 percent in September from a year earlier, matching economists' expectations. Separate data showed Japan's industrial production fell 1.4 percent in September from a month earlier, more than the median estimate for a 1.2 percent decline.

The end of Japan's battle to escape deflation has been ``delayed,'' Economic and Fiscal Policy Minister Hiroko Ota said at a briefing after the data.

Carry Trades

The Japanese yen has fallen against 12 of the 16 most- active currencies in the past year as investors borrowed in Japan, where the 0.5 percent rate is the lowest among major economies, to purchase higher-yielding currencies in the so- called carry trade. The Bank of Japan may leave rates unchanged and lower its growth and inflation forecasts when it meets Oct. 31, according to economists.

``Weak consumer price numbers will encourage yen carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The data are making it more difficult to raise rates. The BOJ may lower its forecasts next week, making it unreasonable to expect a rate hike soon.''

The yen traded at 163.32 against the euro from 163.54. It may fall to 164 today, Soma said.

In a carry trade, 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 market moves erase those profits.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: October 25, 2007 21:04 EDT