The dollar slid to a record low against a basket of currencies on Monday as new worries about the health of US financial firms and fears of a US recession stoked expectations of aggressive rate cuts.
The dollar also hit a three-year low against the yen below 103 and an all-time trough against the Swiss franc as investors rushed to unwind leveraged carry trades in which funds are borrowed in those low-yielding currencies to buy higher-yielding assets.
Gold leaped to a record high above $980 an ounce with investors fleeing to safe assets as Asian stocks suffered from the sell-off on Wall Street last Friday. Japan's Nikkei share average tumbled nearly 4 percent. The dollar fell 0.6 percent from late US trade on Friday to 103.25 yen and slid as far as 102.92 yen, the lowest since January 2005.
Tohru Sasaki, chief forex strategist for Japan at J.P. Morgan Chase, said the dollar could fall to 98 yen by the end of the month as more carry trades are unwound, which would take it to the lowest since 1995. "It's possible for the yen to rise against the dollar for a totally different reason than falling US interest rates," Sasaki said, adding that automatic sell orders towards 100 yen would fuel a further fall.
The abrupt tumble in the dollar against the yen last week has cast a shadow on the US currency from a technical standpoint, and analysts said a fall towards the 101.67 yen low struck in January 2005 was likely. Write-downs at US insurer AIG, talk of a snag in the bail-out of bond insurer Ambac and reports that potential losses from the subprime crisis could reach $600 billion combined to knock 2.7 percent off the S&P 500 share index.
The US economic straits have stirred speculation that the Federal Reserve could slash overnight rates by another 75 basis points before the end of the month to 2.25 percent and take rates below 2 percent by the end of the year.
Such expectations have undermined the dollar, which suffered its biggest weekly drop in two years last week. Traders also fretted about hedge funds being forced to liquidate assets following news that several US banks have seized control of failing hedge fund Peloton Partners.
The euro inched up 0.2 percent to $1.5210 holding near the lifetime peak of $1.5240 hit on trading platform EBS last week. But against the yen, the single currency shed 0.4 percent to 157.03 yen. The dollar's trade-weighted index against six major currencies dropped to 73.531, the lowest since it was created in 1973.
The dollar's tumble comes before a slew of central bank decisions this week that will highlight the differences in how major economies are handling the US slowdown combined with the surge in commodities and inflation. The Reserve Bank of Australia is expected to lift rates to a 12-year high of 7.25 percent from 7 percent, even as the Bank of Canada is seen cutting rates.