The dollar fell to a 15-year low against a basket of major currencies and a record low against the euro on Tuesday, hurt by fears of worsening credit woes and housing market weakness.
If problems emanating from the deteriorating U.S. subprime market spread to other sectors, foreign demand for U.S. non-government debt, a major source of funding for the trade deficit, could waver and further knock the dollar, analysts said.
Doubtless the negative news from subprime and contagion to the broad U.S. credit market is bad news to the U.S. dollar, said market strategists at Societe Generale.
The financing of the U.S. trade deficit has become increasingly dependent on foreign purchases of U.S. corporate bonds, they wrote in a note to clients.
The dollar index dropped to a low of 80.016, near the psychologically significant level of 80.00 and the all-time low of 78.19. By late morning it was at 80.158, down 0.2 percent from Monday.
With five more trading days left in July, the dollar index, which measures the greenback's value against six major currencies, is on pace for the biggest monthly decline since November 2006.
The euro jumped to an all-time high of $1.3853, according to electronic platform EBS, before settling back at $1.3820, nearly unchanged on the day.
The dollar sank to a two-month low of 120.42 yen, and sterling climbed to a 26-year high of around $2.0655. The dollar regained some ground against the yen to trade at 120.58 yen but was still down 0.4 percent.
Credit markets continue to put pressure on the dollar, said Daniel Katzive, currency analyst with UBS in Stamford, Connecticut.
Weakness in the subprime, or risky, mortgage sector is already spreading to some segments of credit markets, forcing investors to flee to relative safety over the last few weeks by buying top-rated government bonds and selling the dollar for almost all other major currencies.
In a sign of the deepening trouble in U.S. credit markets, the 10-year U.S. interest rate swap spread widened to the most since March 2002. Widening swap spreads reflect greater unease with risk.
The latest round of fears about the housing market also coincided with sharply lower second quarter profits from building materials maker USG Corp, which said the housing market is in the midst of a multiyear downturn.
The latest lunge lower in the dollar coincided with a report showing Canadian retail sales in May had the biggest increase in nearly a decade, pushing the greenback to a 30-year low against the Canadian dollar of C$1.0367.
It retraced slightly to C$1.0377 but was ever closer to parity, something markets have not seen since 1976.
Katzive said the U.S. dollar's broad move lower after the Canadian retail sales numbers supported a view that benchmark U.S. interest rates will remain steady while others rise.
Indeed, the New Zealand dollar rose above US$0.8100 to the highest since being floated in 1982 ahead of a policy meeting on Thursday at which the Reserve Bank of New Zealand is expected to raise what are already the highest interest rates in the industrialized world.
In general, dollar weakness is still playing positive for many high yields, with the pound and New Zealand dollar stars in the G10 world, exemplifying the historic extremes that currencies can reach, said Alan Ruskin, chief international strategist with RBS Greenwich Capital.
The dollar's decline this week may have only begun, with June U.S. existing home sales due on Wednesday, new home sales on Thursday and the first take on second quarter gross domestic product on Friday.