The dollar jumped to a 21-month high against a basket of currencies on Wednesday as investors bet that interest rates outside the United States will be cut sharply to try to bolster global growth, Reuters reported.
Concerns there may be a deep slowdown in the world economy prompted investors to liquidate more bets against the dollar built up in recent years, which at one point this year sent the euro to a record high above $1.60, traders said.
The yen also climbed to a four-year high against the euro as investors further unwound risky carry trades that had been a worldwide fad since the early 2000s.
Selling of the dollar and the yen to fund investment in the euro and other higher-yielding currencies and assets -- different forms of carry trades -- was most beneficial to investors when the global economy grew steadily and emerging markets boomed.
But all that has changed now, traders said.
"The euro is being hit by concerns that the euro zone economy will receive an impact from deteriorating economic conditions in the surrounding emerging markets," said Shuichi Kanehira, a senior trader at Mizuho Corporate Bank.
Sterling tumbled below $1.6400 for the first time since September 2003 after Bank of England Governor Mervyn King said on Tuesday that Britain`s economy was probably entering its first recession in 16 years.
Worldwide efforts have eased some strains in dollar funding among banks in money markets, but investors continue to pick up the world`s most liquid currency for safety as the state of financial markets remains fragile, traders said.
The euro fell 1.1 percent to $1.2916 after dropping as low as $1.2910, a fresh 20-month low, on trading platform EBS.
Sterling was down 1.7 percent at $1.6420 after sliding as low as $1.6390, its lowest since September 2003.
The dollar index, which measures the greenback`s value against a basket of six currencies, was up 0.9 percent to 85.200.
It reached as high as 85.233, the highest since January 2007.
The Federal Reserve has slashed its benchmark overnight lending rate by 375 basis points to 1.50 percent, with the last 50 basis points of easing coming earlier this month in coordinated action with other major central banks.
In contrast, the European Central Bank has only lowered rates by 50 basis points to 3.75 percent and that step was part of the coordinated move this month.
Against the yen, the euro fell as low as 129.08 yen, the lowest since April 2004, down 1.3 percent on the day.
The dollar edged down 0.1 percent to 100.05 yen, near the day`s low of 99.94 yen hit earlier.