The dollar hit a 2-1/2 year low against the yen and a record trough versus the Swiss franc on Wednesday, as weak data led to growing fears of a US recession and expectations of hefty interest rate cuts. A dismal reading of December retail sales on Tuesday fuelled market expectations that the Federal Reserve is set to cut rates by as much as 75 basis points this month.
Worries about a US recession weighed on global equity markets, further dampening risk appetite. The MSCI world equity index has lost nearly 7 percent so far this year - on track for its worst monthly performance in half a decade.
Currency investors have become less willing to hold relatively risky carry trades where cheap borrowing in low-yielders like the yen or Swiss franc funds higher return bets.
"All currencies are amazingly respondent to changes in risk appetite right now," said Johan Javeus, FX strategist SEB Merchant Banking. "There is a lot of nervousness about the general outlook for global macro. Stock markets seem to be almost pricing in a recession scenario for the US, and it's also on most economists' radars even if they haven't taken it into their forecasts yet."
The dollar fell to 105.93 yen, the lowest since May 2005. It also slipped to an all-time low of 1.0839 Swiss francs. The euro slid 0.6 percent to 157.09 yen, a four-month low. It also eased against the dollar, to $1.4770 - about two cents below November's record highs.
Worries about a global slowdown hit oil and commodity prices, dragging down the currencies of producing countries. The Canadian dollar slid to a 4-month low versus the greenback, while the Norwegian crown fell more than one percent.
Fed Chairman Ben Bernanke's comments last week that the central bank was willing to take "substantive additional action" cemented expectations of a half point cut in the Fed's benchmark interest rate from 4.25 percent at its scheduled meeting on January 29-30.
Markets are now reflecting a 50-50 chance of three-quarters of a percentage point worth of cuts by the end of this month amid some talk of an inter-meeting move. Further dollar weakness could be prompted by more weak bank earnings after Citigroup reported its first quarterly loss since its establishment in 1998.
J.P. Morgan Chase & Co plans to announce results later in the day and Merrill Lynch follows on Thursday. Market players will be watching inflation and industrial output data later in the day which could further boost expectations for a hefty Fed rate cut.