Sept. 28 (Bloomberg) -- The dollar fell against the yen and approached a record low against the euro on speculation the Federal Reserve will cut borrowing costs for a second time this year, making U.S. assets less attractive.

The currency has weakened against all of the 16 most- actively traded currencies this month. Data later today may show U.S. income growth slowed and spending failed to accelerate in August, suggesting the biggest housing slump in 16 years is weakening the U.S. economy.

``The dollar will continue heading south against major currencies, especially against high-yielders,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. in Tokyo. ``Behind this is the rate outlook. The Fed will cut rates at least one more this year.''

The dollar fell to 114.94 yen at 10:38 a.m. in Tokyo from 115.63 late yesterday in New York. It declined to $1.4158 against the euro from $1.4153 yesterday when it reached a record low of $1.4189. The U.S. currency may move between 109 yen and 116 yen this year, Amikura said.

The yen also gained as Japanese exporters bought the currency to settle their books on the last trading day of the fiscal half year. A government report also showed Japan's industrial production rose 3.4 percent in August from a month earlier, higher than the median estimate for a 3 percent gain.

``There's a lot of yen-buying demand from exporters,'' said Tadahiko Nashimoto, director of foreign exchange at Barclays Bank Plc in Tokyo. ``These flows are pushing up the yen.''

Fed's Rate Cut

The U.S. dollar has fallen against all but two of the 16 most actively traded currencies this quarter, depreciating 4.3 percent against the euro and 6.2 percent versus the yen.

Personal incomes rose 0.4 percent in August, slower than a 0.5 percent gain in the previous month, according to a Bloomberg News survey of economists. Personal spending rose 0.4 percent last month, matching its rise in July, according to a separate survey. The data are due 8:30 a.m. today in Washington.

Fed policy makers on Sept. 18 reduced the target rate for overnight lending between banks by a half percentage point to 4.75 percent. The European Central Bank's key borrowing cost is 4 percent, while the Bank of Japan's is 0.5 percent.

Futures contracts yesterday showed 90 percent odds the Fed would lower its target by a quarter point to 4.50 percent at its next meeting Oct. 31, compared with 72 percent a week ago.

Fannie Mae Chief Executive Officer Daniel Mudd said yesterday the housing slump will last beyond next year, increasing credit losses. Former Treasury Secretary Lawrence Summers said yesterday there is nearly a 50 percent chance the U.S. economy will fall into its first recession in six years.

Dollar Outlook

``The dollar will weaken further as long as the housing slump persists and economic growth weakens,'' said Jeff Gladstein, global head of foreign-exchange trading in Wilton, Connecticut, at AIG Financial Products. ``The Fed will react by cutting interest rates to provide liquidity.''

The Commerce Department's price gauge tied to spending and excluding food and energy costs probably slowed to 1.8 percent in August from a year earlier, according to a Bloomberg News survey before a report to be released at 8:30 a.m. in Washington.

The yen has fallen against all 16 of the most-actively traded currencies this week as Japanese investors sought higher- yielding assets overseas. Investment trusts are selling more than 800 billion yen ($6.9 billion) of mutual funds today focused on foreign assets, according to data compiled by Bloomberg.

``Frankly, sales of our mutual funds are down on recent months,'' said Junya Ota, who oversees the equivalent of about $7 billion at Mitsubishi UFJ Asset Management Co., a unit of Japan's largest lender. ``But whether or not we can actually collect much money for investment trusts, there are lots of yen- selling orders related to them.''

The yen may move between 112 and 117 per dollar this year, Ota said.

Data earlier today showed Japan's core consumer prices, which exclude fresh food, dropped 0.1 percent from a year earlier, prompting investors to increase bets that the Bank of Japan will leave interest rates unchanged.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.

Last Updated: September 27, 2007 21:42 EDT