The dollar hit a fresh two-month low against the euro on Monday as investors shunned the greenback amid signs that the US economy is slowing. The US currency also fell against most of its other rivals, though the selling momentum that began Friday after soft US consumer sentiment data started to ease late in Monday's session.
The gloomy market mood was heightened by expectations that the Federal Reserve will hold interest rates steady again next month, chipping away at the dollar's yield advantage over other currencies.
"The perception out there is the Fed has been removed from the picture, and that's very negative for the dollar," said Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut.
A Reuters survey of 60 economists conducted August 14-17 showed most believe slower US growth will allow the Fed to cut interest rates in the second half of 2007, though only one in five predicted recession on the horizon.
A key beneficiary of dollar selling has been the euro, which climbed to $1.2939 at one point on Monday, according to Reuters data, before easing back to $1.2895, still up nearly 0.6 percent from late Friday.
The single currency also reached a record high at 149.75 yen, according to prices on electronic trading platform EBS, on expectations of a widening interest rate gap between the euro zone and Japan.
Late afternoon, it was at 149.35 yen, up 0.6 percent on the day. The dollar also touched 1.2184 Swiss francs, its lowest since early June. It was last at 1.2240, down 0.7 percent.
The dollar traded flat at 115.81 yen, as rising oil prices, pushed higher after Iran said it would not meet United Nations demands to suspend uranium enrichment, weighed on the Japanese currency.
The European Central Bank raised interest rates to 3 percent earlier this month and signalled more hikes to come. But the Bank of Japan has said it will move slowly before following up last month's 0.25 percentage point rate hike - the first in six years - with more tightening.
The Fed left interest rates steady at 5.25 percent this month after 17 straight hikes over more than two years, and fed funds futures are pricing in just 12 percent chance of a move to 5.50 percent at the central bank's September meeting.
With the US data calendar empty for a second straight day on Tuesday, some said the dollar may be due for a short-term rebound if investors move to take profits.
Strategists at Brown Brothers Harriman in New York noted that the market has already established sizeable positions that bet against the dollar.
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