NEW YORK (Bloomberg) — The dollar fell to a record low against the euro and the weakest in 26 years versus the pound on speculation declining consumer spending will weaken the economy and dim the allure of US assets.The US currency dropped a fifth straight week against the euro and pound amid growing bets that the Federal Reserve will cut interest rates this year to spur growth. US reports next week are forecast to show a slowdown in housing starts and manufacturing, which may fuel more dollar selling.

"The market sentiment is still to sell the dollar," said Jeff Gladstein, global head of currency trading at AIG Financial Products in Wilton, Connecticut. "There is nothing fundamental to change that direction right now."

The dollar fell 1.1 percent this week to $1.3782 per euro and reached $1.3814 per euro yesterday, the lowest since the European currency's debut in January 1999. The US currency declined 1.2 percent to $2.0343 per pound and touched $2.0367 on Friday, the weakest since June 1981. Gladstein said the dollar will slide to $1.40 per euro next week.

The US currency also dropped 1.2 percent to 121.93 yen this week and 1.5 percent against the Australian dollar. The Australian dollar rose above 87 U.S. cents yesterday for the first time since February 1989.

The Fed kept its benchmark overnight rate at 5.25 percent for an eighth straight meeting on June 28. The rate compares with benchmarks of 4 percent in the euro zone, 5.75 percent in the UK and 6.25 percent in Australia. Japan's rate is 0.5 percent.

Traders raised bets the Fed will cut rates. The yield on fed funds futures contracts due in December fell to 5.215 percent this week from 5.235 percent a week earlier and 5.26 percent a month ago. The current yield suggests traders see a 21 percent chance the Fed will cut its benchmark to 5 percent by year-end. The probability was 9 percent a week earlier.

Investors also sold dollars after Moody's Investors Service cut ratings on bonds backed by US subprime mortgages this week, while Standard & Poor's threatened to do the same. The moves raised concern that the losses will spread to other securities.

US retail sales last month dropped 0.9 percent, the most in almost two years, after a 1.5 percent increase in May, the Commerce Department said yesterday.

"Retail sales is the piece of data to destroy the last standing hope of dollar bulls," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. "We are going to see a consumer-led slowdown through the rest of the year, which doesn't bode well for the dollar."

Fed chairman Ben Bernanke will deliver his semi-annual testimony before the House Financial Services Committee on July 18 and to the Senate Banking Committee the following day.

Manufacturing probably slowed this month in both the New York and Philadelphia areas, according to surveys slated for release next week by Fed banks of the two regions. Housing starts also may have slowed last month, a Commerce Department report may show.

The US also releases monthly inflation data. Consumer prices may have risen at a 2.6 percent annual pace last month, down from 2.7 percent in May, according to the median forecast in a Bloomberg News survey. The government releases the data on July 18.