Oct. 29 — 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 against the Canadian dollar and a 23-year low versus Australia’s dollar. Yields on two-year Treasuries are now the least among the Group of Seven nations excluding Japan after traders increased bets the Fed will reduce rates on Oct. 31.

“I remain bearish on the dollar,” said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. “The U.S. has the lowest yields of all other major countries except Japan and Switzerland. This is sending people into a whole range of higher-yielding currencies.”

The dollar fell as low as $1.4435 per euro, the weakest since the introduction of the 13-nation currency in 1999, before trading at $1.4429 as of 7:40 a.m. in London from $1.4393 in New York on Oct. 26. It may drop to $1.4530 this week, Gibbs forecast. The U.S. dollar was at 114.20 yen from 114.19 yen.

The dollar’s 8.4 percent loss against the euro this 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.

Commodity Currencies

The currency’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.

The dollar fell against 14 of the 16 most-actively traded currencies. It slid to 77.24 U.S. cents versus New Zealand’s dollar from 76.62 and as low as 92.56 U.S. cents against Australia’s dollar, the weakest since May 1984. It also fell to $1.0441 against the Canadian dollar, the lowest since 1974.

The Chinese yuan rose 0.3 percent after the People’s Bank of China set the strongest daily reference rate since the end of a fixed exchange rate in July 2005.

The spread, or difference in yield, between two-year U.S. Treasuries and Japanese bonds narrowed to 3 percentage points and approached the least since December 2004. The extra yield on similar German notes over U.S. debt widened to 0.17 percentage point, near the highest since September 2004.

“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.

Rate Outlook

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its overnight rate 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 rate at 8.25 percent last week.

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 New York after Turkey’s foreign minister yesterday said his government is considering military action to deal with Kurdish rebels operating from Iraq.

“The tension is running high, pushing up oil prices,” said Koichi Yoshikawa, head of foreign-exchange trading at BNP Paribas in Tokyo. “This could make oil-producing nations independent of the dollar,” which may fall to $1.45 a euro this year, he said.

Yen Carry Trade

The yen weakened against 15 of the 16 most-actively traded currencies, falling the most against the New Zealand and Australian dollars, as a stock rally spurred investors to buy higher-yielding assets financed by loans in Japan.

“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.”

Japan’s currency may trade between 113 and 115 per dollar this week, Tanase forecast. The yen fell to 164.86 per euro, the weakest since Oct. 19.

The Morgan Stanley Capital International Asia-Pacific Index gained 2.3 percent. The Bank of Japan will keep the benchmark overnight lending rate on hold at 0.5 percent on Oct. 31, according to all 44 economists surveyed by Bloomberg.

The Japanese currency fell 0.9 percent to 88.25 versus the New Zealand dollar. It also declined to 105.81 per Australia’s dollar, the weakest since Oct. 16, from 104.88 on Oct. 26.

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.