The dollar sank to record lows against the euro and a basket of major currencies on Tuesday as bleak warnings of more pain in the credit sphere reinforced views of a Federal Reserve rate cut in December.
Part of the Fed's job is to ensure stability in the banking sector and the latest credit problems raise the risk of an interest rate cut to restore confidence in the financial sector, said Kathy Lien, strategist at Forex Capital Markets.
The euro rose as high as $1.4571, according to Reuters data, its highest level since its 1999 launch. It was last trading at $1.4552, up 0.6 percent on the day.
It was the ninth time in 11 sessions the euro gained against the dollar.
I don't think the dollar will strengthen any time soon (against the euro), said UBS currency strategist Sophia Hardy. There is no foreseeable catalyst to push the dollar up.
A cut in U.S. interest rates is negative for the dollar, weakening its appeal versus higher-yielding currencies.
Analysts are waiting to see if European Central Bank President Jean-Claude Trichet, in remarks expected on Thursday, would hint at a rate rise next month for the euro zone.
Hardy cited flow data showing an extended outflow of investments from the United States to European equities and emerging market central banks diversifying their foreign exchange reserves from dollars to euros.
The dollar index, which tracks the greenback's performance against a basket of six major currencies, dipped to 75.986, the lowest in its more than 30-year history. It was last trading at 76.041, down 0.5 percent on the session.
The drumbeat of bad news for banks kept the market on edge, already uneasy over Citibank's Sunday forecast of up to $11 billion in mortgage-related losses.
On Tuesday, major U.S. home lender IndyMac Bancorp Inc posted a net quarterly loss of $202.7 million. Germany's Commerzbank said it was writing off 291 million euros of assets exposed to risky U.S. mortgages.
Bank of England Governor Mervyn King said it would take months for banks to reveal their full losses stemming from risky mortgages and former Federal Reserve chief Alan Greenspan said the housing debacle was a major risk to the U.S. economy.
Federal funds futures pricing on Tuesday implied a 64 percent probability of a December rate cut, having ranged from 46 percent to over 90 percent since October 18.
The Canadian dollar raced higher, supported by rallying prices of oil and metals, and it traded at historic modern day highs.
The greenback weakened 1.2 percent to C$0.9220, having lost over 20 percent so far this year.
The recent dollar surge drew a warning Tuesday from the second-in-command at Canada's central bank. Bank of Canada Senior Deputy Governor Paul Jenkins said the recent Canadian dollar surge is outside normal bounds, and sustained strength would pose risks to the Canadian economy,
Against the yen, the U.S. dollar gained 0.2 percent to 114.6 yen. But analysts attributed that largely to renewed borrowing in the low-interest Japanese currency to fund carry trade investments in the currencies of Australia and New Zealand, which bear the highest interest rates in the developed world.
The New Zealand dollar gained 1.2 percent to US$0.7781.
The Australian dollar rose 0.7 percent to US$0.9261, helped by expectations of a benchmark rate hike Wednesday to an 11-year peak of 6.75 percent, which could make local assets more attractive to foreign investors.
Australia is a major metals exporter, and the Aussie was also helped by surging world metals prices. Gold prices hit a 28-year high on Tuesday.