The dollar briefly plunged to a record low against the euro as concerns mounted over the U.S. mortgage market and its impact on the wider economy.
The euro jumped to an all-time high of $1.6038 as confidence on financial markets continued to plummet after the U.S. government on Sunday announced plans to bail out mortgage lenders Fannie Mae and Freddie Mac. Investors are nervous that a Federal Reserve bail-out could add billions of dollars to the U.S. national debt, and lower the country's credit rating.
"Traders continue to fall out of favour with the dollar, looking for safer currencies instead," said CMC Markets analyst James Hughes. "Sunday's announcement by the Fed regarding its mortgage bail-out plan for Fannie Mae and Freddie Mac remains somewhat derided in the market -- it's apparently done little more than underline the perilous state of the U.S. economy," he added.
The market jitters drove the euro higher despite a drop in the German ZEW institute's economic expectations index for July to a record low, while the pound breached the $2.00 mark.
Attention will now turn to the release of U.S. retail sales and the producer price index, and Federal Reserve chairman Ben Bernanke's semi-annual testimony to the Senate Banking Committee. "Bernanke might provide some conciliatory words to provide support to the market, but given the current softness of the dollar, the data releases will also be crucial," said an analyst at BNP Paribas.