Nov. 3 (Bloomberg) -- The dollar fell to a record against the euro and dropped to the weakest since 1981 versus the pound on concern deepening credit-market losses will prompt the Federal Reserve to reduce interest rates a third time this year.

Investors sold the dollar for a fourth week versus the euro as German bunds widened their yield advantage over Treasuries to the highest since 2004 after the Fed's rate cut on Oct. 31. The European Central Bank and Bank of England are forecast to keep borrowing costs unchanged Nov. 8, which may entice investors away from U.S. assets.

``The dollar's negative tone remains,'' said Robert Fullem, vice president of U.S. corporate currency sales at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. ``I don't think there are many dollar buyers there. The interest-rate differential continues to move against the dollar.''

The dollar fell 0.8 percent this week to $1.4504 per euro, reaching $1.4528 yesterday, the weakest since the European currency's debut in January 1999. The loss this week extended the dollar's decline this year to 9 percent. The dollar lost 1.8 percent against the pound for the week and touched $2.0897 yesterday, the lowest since May 1981.

The dollar may decline to $1.50 per euro and $2.10 against the pound by year-end, Fullem said.

The yen declined against 15 of 16 most-actively traded currencies this week after the Bank of Japan kept its interest rate at 0.5 percent and cut its growth outlook. Japan's lowest borrowing costs among major economies encouraged investors to sell the yen and buy higher-yielding assets elsewhere.

Australia's benchmark interest rate is 6.5 percent, compared with 8.25 percent in New Zealand.

The yen lost 0.6 percent this week to 114.85 per dollar and 1.4 percent to 166.63 versus the euro. Japan's currency declined 1.1 percent over the same period versus the Australian dollar and 0.5 percent against New Zealand's dollar.

Canada's Dollar

Canada's dollar was the best performer among major currencies this week, rising to the strongest against its U.S. counterpart since it was floated by the Bank of Canada in 1950. A report showing the nation's job growth accelerated and surging commodities prices boosted the allure of local assets.

The Canadian dollar gained 2.9 percent this week against the U.S. currency and reached $1.0721 yesterday. Crude oil climbed to a record $96.24 a barrel on Nov. 1 while gold yesterday settled above $800 an ounce for the first time since 1980.

The European Central Bank will keep its interest rate at 4 percent on Nov. 8, while the Bank of England may hold borrowing costs at 5.75 percent, according to Bloomberg forecasts.

The yield advantage of the two-year German bund over comparable-maturity U.S. Treasuries increased to 0.26 percentage point yesterday, the widest since April 2004. A widening spread boosts the allure of European debt relative to that in the U.S.

Dollar Index

The dollar has weakened against all 16 major currencies this year as Fed rate cuts dimmed the allure of U.S. assets. The U.S. Dollar Index traded on ICE Futures U.S. in New York fell to as low as 76.220 yesterday, the weakest since its inception in 1973. The Australian dollar reached 93.43 U.S. cents on Oct. 31, the highest since April 1984.

The odds of the Fed cutting its target rate by a quarter- percentage point to 4.25 percent on Dec. 11 increased to 68 percent yesterday from 60 percent a day earlier, futures traded on the Chicago Board of Trade show. The central bank reduced the overnight rate for loans between banks by a quarter-percentage point on Oct. 31 and a half-percentage point on Sept. 18.

There's growing ``speculation the Fed will cut rates much more aggressively than has been priced in, which is very negative for the dollar,'' said Michael Klawitter, a currency analyst at Dresdner Kleinwort in Frankfurt, who forecasts the U.S. currency may fall to as low as $1.50 per euro by the end of March. ``There is mounting concern the market has underestimated the risks to the U.S. financial sector and the wider economy.''

U.S. Data

The Institute for Supply Management may report next week its service-sector gauge slowed to 54 last month from 54.8 in September, while the Reuters/University of Michigan preliminary sentiment index may drop to 80 this month, the lowest since May 2006, from 80.9 in October, according to Bloomberg News polls.

Investors sold the dollar this week after stock analysts cut their ratings on Citigroup Inc., and Deutsche Bank AG said Merrill Lynch & Co.'s writedowns on collateralized debt obligations may reach $10 billion.

`Financial Trouble'

``People believe that the financial trouble will pick up and that the Fed will end up having to cut after all,'' said Win Thin, a currency strategist with Brown Brothers Harriman & Co. in New York. ``We may go to $1.50 per euro in this quarter.''

Credit concern trumped two government reports this week that showed the world's largest economy advanced at an annualized 3.9 percent in the third quarter, and U.S. employers added 166,000 nonfarm jobs last month, up from a revised 96,000 in September.

International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from the stock market. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July, the Treasury Department said Oct. 16 in Washington.

The U.S. currency will strengthen to $1.40 per euro by the end of June next year and rise to $1.35 by the end of 2008, according to the median of 44 forecasts compiled by Bloomberg News.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net