The dollar slid to a 12-year low against a basket of major currencies on Wednesday, taking a hit from fears about the fallout from US subprime mortgages and expectations for higher interest rates from Europe to New Zealand.
The euro hit a record peak of $1.3834 on electronic trading platform EBS and sterling vaulted to a 26-year peak above $2.05 as the dollar was pressured by news about the ongoing woes of two Bear Stearns hedge funds that bet heavily on subprime loans.
Worries that troubles in the subprime mortgage market could cast a pall over the broader US economy and financial markets also helped drag the dollar lower against the yen and the Australian and New Zealand dollars.
"It's almost as if there's some risk aversion against the dollar," said Tomoko Fujii, head of economics and strategy for Bank of America in Tokyo. The dollar's trade-weighted index against six major currencies fell as low as 80.227 - the weakest since April 1995 and possibly setting the US currency up for further losses, traders said.
The US currency suffered as 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.
The subprime troubles have compounded the dollar's eroding appeal as the Federal Reserve keeps rates on hold but other major central banks are seen lifting interest rates further.
Sterling rose as high as $2.0548 on the Reuters dealing system and last changed hands at $2.0538, up 0.4 percent from late New York trade on Tuesday. The euro climbed 0.3 percent to $1.3825 after reaching its strongest since the single currency's launch in 1999. The dollar shed 0.4 percent to 121.70 yen with the yen gaining support as investors unwound some of their bets against the low-yielding Japanese currency.
The US currency fell across the board, with the Australian dollar jumping to an 18-year peak of $0.8786 after Reserve Bank of Australia Governor Glenn Stevens said he was not surprised by the Aussie's strength.