The dollar broke above $1.40 per euro for the first time on Thursday, weakened by a hefty U.S. interest rate cut this week and expectations of further cuts in benchmark rates.

The breach of the key $1.40 level in early European trade sparked a broad-based euro rally. The euro zone single currency also rose above 70 pence for the first time in 1-1/2 years.

Investors will be looking for more clues on the outlook for interest rates when Federal Reserve Chairman Ben Bernanke testifies before a congressional committee on Wednesday at 10 a.m. (1400 GMT) on problems in the subprime mortgage sector.

After Tuesday's rate cut the dollar has a lot more on the downside, said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. There are rate differentials and uncertainty on the U.S. growth front.

The Fed, the U.S. central bank, on Tuesday slashed rates by a half percentage point to 4.75 percent to shield the economy from a deepening housing slump and credit market turbulence.

Early in New York, the euro had risen to a record high of $1.4064, before surrendering some gains to trade up 0.6 percent on the day at 1.4049. The dollar was down 0.9 percent against the yen to trade at 115.03 per dollar.

The dollar also set 15-year lows against a basket of six major currencies, at 78.756. A move below 78.190 would take the dollar index to record lows.


Investor focus is largely centered on Bernanke, who expects soft house prices and mortgage rate resets to mean subprime adjustable-rate home loan delinquencies will rise further, according to a copy of his prepared remarks provided to Reuters by a source.

The euro rose and then surrendered gains when headlines appeared ahead of the testimony but analysts cautioned reading too much into the euro reaction.

It's pretty clear (Bernanke) expects more weakness in the housing sector but the fact that he says the market is self-correcting leads me to believe he expects the system to work itself out without too much help from the Fed, said Dustin Reid, senior currency strategist at ABN AMRO in Chicago.

Of the euro move, Reid said, It's uncharted territory, and when you're in uncharted territory, it's difficult to look at every little wobble in price and try to attribute it to a specific event or fundamental.


Sterling edged higher versus the dollar after Bank of England Governor Mervyn King said that cutting interest rates at first sight of every problem was not the way to go. Sterling/dollar rose 0.5 percent at 2.0099.

The Australian and New Zealand dollars rallied broadly, up 0.8 percent and 1.2 percent respectively, as Tuesday's Fed rate cut continued to calm risk aversion and make investors more willing to return to risky carry trades where purchases of high-yielding Antipodean currencies are funded by cheap borrowing in low-yielders such as the yen.

(Additional reporting by Steven C. Johnson in New York and Simon Falush in London)