The dollar hit a record low against the euro and a basket of major currencies on Wednesday and the yen rose sharply as concerns on the health of the US economy and global credit markets saw investors flee risky carry trades.
The yen rose to its highest since June 2005 against the dollar as a tumble in European and Asian shares prompted investors to move into safe-haven, lower yielding assets.
The high yielding Australian dollar fell by more than 2 percent and sterling - another key destination for carry trades - touched a 4-1/2 year low against the euro as investors headed for safe-haven assets.
"The driving theme is risk aversion with equities in Asia and Europe down. The dollar is suffering from a fear of a US slowdown which will have an impact on monetary policy," said Niels From currency strategist at Dresdner Kleinwort in Frankfurt.
"It's Thanksgiving (on Thursday) and trading volumes will be lower and the fact that there is less liquidity means there will be more volatility and this could prove a dangerous cocktail for the rest of the week." By 1134 GMT, the dollar was down 1.3 percent at 108.52 yen, just above a 108.27 low since June 2005.
The euro had given up some of its gains to trade down 0.2 percent on the day at $1.4788, after striking a record high of $1.4856, according to Reuters data. Besides market expectations that the Federal Reserve will cut interest rates further, the dollar has been under pressure from growing speculation that Middle East oil exporters, including Saudi Arabia, may ditch or re-value their dollar pegs.
Oil homed in on $100 a barrel and European equities hit their lowest in three months, with banks such as HSBC and UBS faring particularly badly. The dollar also hit an all-time low against the Swiss franc at 1.1025 francs while it sank to a record low against a basket of six major currencies at 74.951.
The Fed projected on Tuesday that US economic growth will slow in 2008 to between 1.8 and 2.5 percent, down sharply from the 2.5 to 2.75 percent forecast in June, before picking up in 2009. Minutes of the Fed's October meeting released on Tuesday showed that the central bank's decision to lower interest rates last month was a close call.