The dollar teetered close to its all-time lows against the euro on Thursday as the market waited to see whether the European Central Bank would voice concern about the sharp rally in the single currency.
The ECB is widely expected to announce no change in its 4.0 percent interest rate later on Thursday, so all eyes will be on what President Jean-Claude Trichet says about the conflicting challenges of euro strength and a jump in inflation.
Meanwhile investors remained perturbed by expectations that the Federal Reserve could cut rates again next month, further reducing the dollar's yield appeal, with stock futures already pointing to a weak start on Wall Street.
On Wednesday, Morgan Stanley said it took a $3.7 billion loss from its subprime mortgage exposure. And General Motors Corp reported its biggest ever quarterly net loss of $39 billion, adding to fears the US's credit problems could be spreading to the wider economy and hurting growth.
"That drip feed of bad news for the dollar is likely to continue right through the Christmas and New Year period," said Adam Myers, market strategist at Credit Suisse.
"We are expecting Trichet to remain very hawkish so what we should see euro/dollar touching a new high this afternoon," he added. The dollar index, which measures its value against a basket of six major currencies, was down 0.2 percent at 75.456, off its record low of 75.077.
By 1207 GMT, the euro was up 0.1 percent at $1.4662, after surging to an all-time high of $1.4730 on Wednesday according to Reuters data. One-week implied euro/dollar volatility surged to a 2-1/2 year high of 10.1 percent. One-month and one-year vols were at their highest since the peaks set in mid-August at the height of the credit market crunch.
Louis Gallois, chief executive of Airbus maker EADS described the euro's slide versus the dollar as a "Sword of Damocles" hanging over the French company, saying it will force a new round of cost-cutting. EADS' main rival is US-based Boeing, whose prices are now looking much more competitive thanks to the weak dollar.
The ECB decision is due at 1245 GMT, followed by Trichet's news conference at 1330 GMT. The Bank of England left rates on hold at 5.75 percent on Thursday. Although the decision was in line with expectations, it gave sterling a boost as a minority of investors had been positioned for a rate cut. Sterling rallied to a fresh 26-year high at $2.1088 after the BoE decision.
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