The dollar fell to a record low against the euro on Wednesday as an expected interest rate cut next week from the Federal Reserve continued to erode the U.S. currency's appeal.

The dollar also fell to a fresh 15-year low against a basket of six major currencies as continued problems in the credit market and weak jobs data led investors to anticipate a cut of 50 basis points in U.S. rates.

The expected half percent cut in rates means spreads between the U.S. and euroland are narrowing, removing whatever is left for any positive carry for the dollar, said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.

However even if the Fed cut by only a quarter point, the outlook for the dollar was negative, said From.

The outlook for the dollar is bleak; if the Fed only cuts by 25 basis points the market will think that it is not reacting strongly enough, stoking fears that the economy is heading for recession which is also negative for the greenback.

The yen initially slipped on Wednesday as Japanese Prime Minister Shinzo Abe resigned, but regained ground as the euro hit a record high against the dollar.

With investors still worried about turmoil in credit and markets stemming from problems in the U.S. subprime mortgage sector, Abe's resignation alone was not likely to play a crucial role in shifting market focus to the yen, traders said.

A currency is sold when there is political uncertainty, so it was natural that the yen was sold, said Tomohiro Iwata, chief forex dealer at Goldman Sachs, adding that more details were needed to determine the yen's direction.

The euro rose as high as $1.3878 according to Reuters data, the highest since the launch of the single European currency in 1999. It last traded at $1.3841, flat on the day.

The dollar's trade-weighted index against six major currencies fell to a 15-year low for the fourth consecutive session of 79.459 before recovering slightly to stand at 79.573.

The dollar fell 0.1 percent to 114.12 yen.

The euro slipped 0.1 percent to around 157.99 yen.


Remarks by European Central Bank President Jean-Claude Trichet who said on Tuesday the ECB's monetary policy remained accommodative also added support to the euro.

Conversely, U.S. Treasury Secretary Henry Paulson's prediction that market turmoil would last longer than the 1998 financial crisis put the dollar under additional pressure.

Paulson made clear that the current crisis has very little to do with central banks running too tight liquidity conditions, said BNP Paribas in a client note.

Hence, the problem of wide credit spreads and disfunctioning money markets will not be solved by adding central bank liquidity.

Investors will look to euro zone industrial production data at 0900 GMT for further clues on how its economy is performing and whether further interest rate hikes are on the cards.

(Additional reporting by Chikako Mogi in Tokyo)