The dollar hit a record low versus the euro and reached a three-year nadir against the yen on Monday as the prospects for continued low US interest rates dulled investors' appetite for the currency.
Federal Reserve Board Governor Ben Bernanke said in a speech on Sunday that the Fed is right to hold interest rates at 45-year lows even though the US economy seems to have improved while keeping inflation low with productivity gains.
Bernanke said the risk of a "dollar crisis" was low. He added that the effects of the dollar's decline on inflation "appear to be relatively small" because foreign producers tend to absorb most of the impact of the dollar's drop.
The prospect of interest rates remaining low is likely to encourage investment outflows from the dollar to higher-yielding currencies at a time when the United States needs capital inflows to cover its current account deficit.
"It's fairly dovish," Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago, said of Bernanke's comments.
"The FX (foreign exchange) market right now is looking for some type of a signal to stop shorting the dollar. What he's saying is the signal is going to be a long time in coming."
The Federal Reserve's Open Markets Committee is scheduled to meet to discuss interest rates in late January, and markets are forecasting US rates to remain on hold at 1 percent.
"For now, I believe that the Federal Reserve has the luxury of being patient," Bernanke told the American Economic Association in San Diego on Sunday.
In late New York trading, the euro was up 0.65 percent at $1.2664 but down from the record high $1.2695 reached earlier, according to Reuters data.
"The dollar is not really trading off of fundamentals, which have been excellent in the United States. This is a momentum move, and until there is something to change the environment, it is going all one way against the dollar," said Mike King, a trader at Commerzbank in New York.
The dollar's decline continued to fuel a rally in gold prices, lifting futures prices above $425 an ounce for the first time in 15 years.
The dollar fell 0.75 percent to 106.23 yen after trading at a new three-year low of 106.06 yen, according to Reuters data.
"It looks like the BoJ (Bank of Japan) lowered its threshold for where it is going to intervene from around 106.90 to 106. When the market sensed that, it just pushed the dollar toward that level," said King.
Traders said Japanese and speculative names were selling dollars for yen, even though the market was wary of Japanese intervention after suspected yen-selling action in Asian trading hours.
Japan's vice finance minister for international affairs, Zembei Mizoguchi, said on Monday Japan remained ready to step into the foreign exchange market if there were a danger of volatility.
The dollar dipped 0.43 percent to 1.2333 Swiss francs. Sterling gained 0.76 percent to $1.8063.
The US economic data schedule featured little to move forex markets.
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