The Dollar hit a record low against the Euro for the third straight session on Monday amid fears that a deepening housing slump could pressure on economic growth and trigger more cuts in US interest rates.
Trading was light as attention shifted to existing-home sales and consumer confidence data due today.
Investors are worried that weak economic reports will push the Federal Reserve to follow last week's half-percentage-point rate cut with more policy easing, further eroding the dollar's yield advantage over other currencies, particularly the Euro. Several Wall Street firms have downgraded their outlook on US Gross Domestic Product over the next several quarters.
The EurUsd closed at 1.4074 after earlier hitting a record high 1.4131. The UsdJpy traded at to 114.84, down 0.54%, below its level late on Friday as investors remained wary of piling back into carry trades, which involve using cheaply borrowed Yen to buy higher-yielding currencies and assets.
Analysts say the recent sharp declines in the dollar may provide some investors a short-term buying opportunity. But on a longer term, the focus will remain on interest rates and the dollar's dwindling yield advantage.
Interest rate futures are pricing in a roughly 66 percent chance of a 25bp Fed rate cut in October, down from 72 percent at Friday's close. At least one more quarter-point cut has been factored in by year-end on top of any move at the Fed's next meeting in October.
Investors overlooked criticism of the European Central Bank from a French presidential aide who said euro strength was eroding European competitiveness and business productivity. ECB President Jean-Claude Trichet also brushed off the remarks, saying the central bank's main task was to ensure price stability.
The Dollar rose against Sterling on Tuesday as a report in a British newspaper stirred concerns over deepening problems in the UK's financial sector due to the credit crunch. The Independent reported this morning that Britain's deposit protection scheme holds only Â£4.4 million ($8.9 million) to protect the country's bank deposits, far smaller than the $49 billion fund at the U.S. Federal Deposit Insurance Corporation. The news raised worries over the stability of the British financial system after depositors had rushed to withdraw savings from troubled mortgage bank Northern Rock.