Sept. 21 — The dollar fell to a record low against the euro and sank to the lowest in almost 31 years versus Canada’s currency on speculation the Federal Reserve will keep cutting U.S. interest rates.

The U.S. dollar weakened against 12 of the 16 most-active currencies after Fed Chairman Ben S. Bernanke said yesterday the sell-off in credit markets could make the housing recession more severe. The yield advantage for two-year Treasury notes over similar-maturity German bunds shrank to 0.05 percentage point from 0.08 percentage point yesterday.

“The dollar weakness will drag on,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “The crisis is not over and the Fed is likely to cut rates further.”

The U.S. currency traded at $1.4080 against the euro at 8:56 a.m. in London from $1.4064 late yesterday in New York, recouping some losses after reaching a record low of $1.4120. The dollar has lost 1.6 percent this week against the euro, extending its 2007 decline to 6.4 percent.

The currency declined to $1.0013 per Canadian dollar, near to the weakest since November 1976, bringing its loss this week to 3.1 percent. The dollar has dropped 0.3 percent this week to 115.01 yen. The Fed’s trade-weighted dollar index reached the lowest since its inception in 1971.

The Fed cut its benchmark interest rate half a point to 4.75 percent to prevent the collapse of the subprime-mortgage market from pushing the world’s largest economy into recession. The European Central Bank’s rate is 4 percent, while the Bank of Canada’s is 4.5 percent.

Subprime Fallout

Futures contracts show 72 percent odds of a quarter- percentage point cut to 4.5 percent at the Fed’s next meeting on Oct. 31. Jim O’Neill, head of global economic research at Goldman Sachs Group Inc., predicts the Fed will cut rates to 4 percent by early next year.

Fed officials including Vice Chairman Donald Kohn, Governor Frederic Mishkin and Governor Kevin Warsh are scheduled to speak on monetary policy today. Bernanke told lawmakers yesterday that the central bank is “actively working” to avoid a repeat of the subprime-mortgage rout.

“The broader U.S. dollar weakness story is firmly back on the table,” said Paul Milton, chief dealer at Societe Generale SA in Sydney. “Underlying this week’s moves was the Fed decision and the market should focus on U.S. fundamentals.”

The dollar is likely to fall to $1.42 per euro in the next few days, he said.

Oil prices held near a record high of $83.90 a barrel due to a storm threat in the eastern Gulf of Mexico. Since early 2002, the correlation between oil and the dollar has been negative. When oil rises, the U.S. currency falls.

Solid Economy

The euro headed for its biggest weekly gain in six months against the dollar on speculation ECB officials will today express optimism the 13-nation economy is resilient enough to withstand higher borrowing costs.

“The European economy is still solid,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. “This is a reason why the euro is being bought.”

The euro may advance to $1.4100 and 161.80 yen today, Muramatsu said.

ECB policy makers including President Jean-Claude Trichet have signaled they want to raise rates further to contain inflation once financial-market turmoil abates. ECB executive board members Lucas Papademos, Bini Smaghi and Juergen Stark are speaking at a Bundesbank symposium today.

The yield on the three-month Euribor futures contract for December rose 1 basis point to 4.46 percent today. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999. A basis point is 0.01 percentage point.

Carry Trades

The yen fell against 14 of the 16 most-active currencies on signs investors have resumed purchases of higher-yielding assets funded by loans in Japan.

The yen has dropped 4.6 percent against the New Zealand dollar and 3.6 percent versus the Australian dollar this week as the Fed rate cut bolstered confidence in so-called carry trades. Lower U.S. borrowing costs may help sustain global economic growth, supporting prices of property, stocks and commodities.

“There will be a gradual return to carry trades and yen selling,” said Katsunori Kitakura, chief treasury dealer at Chuo Mitsui Trust & Banking Co. in Tokyo. “The Fed’s rate cuts have made people more willing to take on risk.”

The Japanese currency fell to 162.01 per euro, from 161.39 late yesterday in New York and 160.08 a week ago. It may drop to 163 against the euro today, Kitakura said.

Japan’s currency weakened 1.2 percent to 85.61 per New Zealand dollar, from 84.61 yesterday, and dropped 1 percent to 99.88 versus Australia’s dollar, from 98.92.