The dollar neared a record low against the euro on Tuesday as expectations of a Federal Reserve interest rate cut continued to erode the greenback's appeal to global investors.

The possibility of lower rates also helped global stocks recover as investors cautiously waded back into risky trades, lifting the dollar against the low-yielding yen.

The dollar struggled against most other currencies, however, as housing and credit crises have shown signs of curtailing U.S. growth.

A report on Friday showing U.S. payrolls shrank in August for the first time in four years increased fears of recession.

Slower growth is creeping in, and that's having a negative impact on the dollar, said Ashraf Laidi, chief currency analyst at CMC Markets in New York.

People recognize that the implications of the credit turmoil are more pronounced in the United States and will have more of a policy implication there than in Europe, he added.

Late afternoon, the euro was up 0.3 percent at $1.3835, a breath away from a record high above $1.3850.

The dollar also hit a 15-year low against a basket of major currencies for the third straight trading session.

Fed Chairman Ben Bernanke, speaking in Berlin on Tuesday, said nothing to dim expectations that the Fed will cut the benchmark federal funds target rate by at least a quarter percentage point on September 18.

Implied chances of a half-percentage-point cut have receded somewhat since Friday but still stood at about 50 percent, according to fed funds futures markets.

European Central Bank President Jean-Claude Trichet also boosted the euro, saying euro-zone credit losses were not big enough to weaken financial institutions.

He also said policy remained accommodative, which investors took to mean that the ECB could keep rates on hold for some time to come or possibly raise them again.

With the Fed seen cutting rates, Trichet's more hawkish stance cut into the dollar's rate advantage over the euro and sends a very strong bullish signal, suggesting it's only a matter of time before the euro breaks above $1.40, said Dustin Reid, senior currency strategist at ABN AMRO in Chicago.


Currencies largely shrugged off a report showing the U.S. trade deficit narrowed slightly in July, roughly in line with expectations.

With no other top-tier data releases to guide them, traders moved back into carry trades that use cheaply-borrowed yen to invest in higher-yielding assets and currencies.

The dollar rose half a percent to 114.29 yen and the euro gained 0.8 percent to trade at 158.10 yen .

Gold prices hit a 16-month high above $714 an ounce, another sign of risk-seeking behavior, Laidi said.

But he said further dollar weakness across the board except against the yen should be the order of trading flows until the Commerce Department releases its August U.S. retail sales report on Friday.

Any sign of weakness there would be taken to mean housing and credit woes are causing consumers to put away their credit cards, which Laidi said could batter carry trades.

(Additional reporting by Vivianne Rodrigues)