TOKYO (Bloomberg) <\m> The yen traded at a record low against the euro and headed for the biggest weekly drop since July 2004, after the Bank of Japan signaled it would maintain the lowest interest rates among major economies.Japan’s currency was also set for the largest losing week versus the dollar since July. Japan’s central bank lifted borrowing costs to 0.5 percent this week and suggested the pace of increases would be gradual, encouraging investors to borrow yen to buy higher-yielding assets in so-called carry trades.

“Yen carry trades are surging on prospects Japan’s rate disadvantage won’t disappear anytime soon,” said Takehiko Jimbo, currency manager in Tokyo at Mitsubishi UFJ Trust & Banking Co., a unit of Japan’s biggest lender by assets. “There are still more than a few investors who had missed out on selling yen due to the BOJ meeting this week, which was a big risk event.”

The currency fell 1.7 percent this week to 159.54 per euro at 8:26 a.m. in Tokyo, from 156.89 on February 16, and reached an all-time low of 159.65. Against the dollar, it declined 1.8 percent this week to 121.54 from 119.43 on February 16. The yen may fall to 159.90 a euro and 122.10 per dollar today, Jimbo said.

The yen is the worst performer of the 16 most-active currencies in the past six months, dropping 4.1 percent against the dollar and 6.5 percent versus the euro.

Bank of Japan Governor Toshihiko Fukui said his board will hold interest rates “as low as possible.”

The Federal Reserve and the Bank of England set rates at 5.25 percent and the European Central Bank’s main borrowing cost is 3.50 percent. Australia’s overnight cash rate target is at a six-year high of 6.25 percent and New Zealand’s official cash rate is 7.25 percent.

The New Zealand and Australian dollars are the two best- performing Asia-Pacific currencies against the yen this week.

The decrease may encourage carry trades, as it implies smaller exchange-rate fluctuation risk. The one-month implied volatility of yen against the euro, the pound and the Australian currency also declined.

l The pound touched its lowest in a week versus the dollar as signs UK inflation is slowing diminished the chance of further interest-rate increases by the Bank of England. The UK currency extended Wednesday’s drop after BOE chief economist Charles Bean said inflation in Europe’s second-largest economy is likely to meet the central bank’s target in two years, suggesting it won’t lift borrowing costs again. Traders reined in bets for higher rates yesterday after minutes from this month’s rates meeting showed seven BOE policy makers voted to keep rates unchanged and two backed an increase.

“We could see sterling suffering in the next few days because of additional selling pressure,” said Jeremy Stretch, senior currency strategist at Rabobank Groep in London.

Against the dollar, the pound was at $1.9597 at 6.28 p.m. in London.