The dollar hit record lows versus the euro on Wednesday, knocking major stock markets as General Motors posted its biggest quarterly loss ever which rattled investors already concerned about the U.S. economy.
Safe-haven gold rose to its highest level in nearly three decades while oil closed in on $100 a barrel.
The losses at the largest U.S. automaker come as the U.S. economy is grappling with the housing market downturn and the fallout from the subprime mortgage crisis.
Expectations for further interest rate cuts by the Federal Reserve have been weighing on the dollar as they would erode the yield that the currency offers.
The U.S. already faces problems to absorb losses in the subprime mortgage market and now they might face problems related to the financing of their (current account) deficit, said Romain Boscher, head of equity management at Groupama Asset Management in Paris.
European currencies have borne the brunt of the dollar's weakness and their strength weighed on European shares on concerns that exports and earnings will be hit.
Lawrence Peterman, investment director at Eden Financial, said: The dollar at $2.10 (per pound) is extremely negative for UK stocks. There is quite a big percentage of the FTSE that earns money in dollars so it just reduces their profit.
DOLLAR AND OIL
The dollar fell beyond $1.47 per euro, bringing its losses this year to around 10 percent. Investors used comments from a Chinese politician that the country's huge foreign exchange reserves should hold more euros as an excuse to sell the dollar.
The dollar also set record lows against a basket of six major currencies, on track for its biggest one-day fall since November 2006.
Sterling set a new 26-year high above $2.10 while the yen was beyond 113 per dollar, up 1.5 percent.
U.S. light crude oil hit a record $98.62 a barrel, bolstered by a weakening dollar and concerns about a winter fuel crunch due to thinning oil stocks and a storm in the North Sea. A weaker dollar makes it cheaper to buy oil, which is priced in dollars.
Analysts say surging oil prices are in turn weighing on the dollar, creating a vicious cycle for the U.S. currency.
Rampant energy prices serve to place even greater sums into the hands of oil exporters who continue to recycle receipts out of dollars and into other liquid FX such as euro and sterling, ING said in a note to clients.
Gold rose to $845.40 an ounce, its highest in nearly three decades. Silver hit a 27-year high while platinum set a record.
These markets are very much intertwined ... Weakness in the dollar has got people on their toes and looking for safe havens and that is gold, said Matthew Cairns, senior economist at Moody's economic research arm Economy.com.
The FTSEurofirst 300 index erased early gains to fall 0.8 percent.
U.S. stock futures were down more than 1 percent, indicating weaker open on Wall Street. GM shares fell 7.1 percent in pre-market trading. Earlier, it posted a record $39 billion loss for the third quarter.
MSCI's main world equity index was helped by strength in emerging markets, trading up 0.2 percent at 420.19. The index is within 10 points of record highs set last week.
Emerging sovereign spreads widened 3 basis points.
The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, widened 8 basis points to 353 bps.
U.S. two-year Treasuries yield hit 3.608 percent, its lowest since July 2005. The December Bund future was up 50 ticks.