The dollar slid to a 12-year low against a basket of major currencies on Wednesday, hurt by fears that troubles in the US housing sector could necessitate rate cuts at a time when other central banks are tightening policy.
The dollar also fell to an all-time low versus the euro and hit a 26-year trough against sterling, pressured by news of ongoing woes of two Bear Stearns hedge funds that bet heavily on subprime loans.
With yield differentials in focus, investors are looking for further clues on the US rates outlook from consumer prices data for June at 1230 GMT and to congressional testimony by Federal Reserve Chairman Ben Bernanke at 1400 GMT. With the spotlight on the US housing market, June building permits and housing starts figures at 1230 GMT will also be of interest.
"The market is focused on interest rate differentials," said Neil Mellor, currency strategist at Bank of New York. "The market is not pricing in a rise in US rates in the foreseeable future and with rates rising elsewhere, newsflow would need to be extraordinary to change sentiment for the dollar."
Any comments from Bernanke on troubles in the subprime mortgage market - which caters for borrowers with a troubled credit history - could be key. "He won't be able to ignore the subprime issue and he is likely to say the economy can cope with it but investors will look to see if comments pop out under questioning that could scare the market." said Tom Levinson, FX strategist at ING.
Against a basket of six major currencies, the dollar fell as low as 80.227 - the weakest since April 1995. The euro climbed to a historic high of $1.3833 before retreating to $1.3776 by 1159 GMT, flat on the day.
Sterling rose as high as $2.0548, according to Reuters data - its strongest since 1981, but pared some of those gains after minutes from the Bank of England's latest rate-setting meeting showed three of its nine-strong Monetary Policy Committee voted against a July rate hike, in line with expectations.
The dollar was flat against the yen at 122.13. The Australian dollar jumped to an 18-year peak of US $0.8786 after Reserve Bank of Australia Governor Glenn Stevens said he was not surprised by the Aussie's strength.
The Canadian dollar fell to session lows against the US dollar after an unexpected fall in headline CPI on the month in June, having set three decade peaks against the greenback earlier in the session. The core measure of inflation quickened to 2.5 percent in June from 2.2 percent in May. Many analysts expect the dollar's weakness to continue, with spreads moving against the greenback and a $1.40 euro/dollar level on the cards.
The implied spread between December eurodollar and Euribor futures has fallen to 74 basis points in favour of the dollar now from 87 basis points a month ago, while US-eurozone government bond yield differentials have also compressed.
The dollar suffered a blow after Bear Stearns said in a letter to investors on Tuesday that two of its hedge funds that bet heavily on risky subprime loans now have "very little value", giving a boost to Treasuries in Asia trade.
Wednesday's data could add to the dollar's troubles. Core US consumer prices are seen rising 0.2 percent in June, keeping the annual rate of inflation stable at 2.2 percent. Headline inflation though - which includes rises in food and energy costs - is expected to pick up to 2.4 percent.
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