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By Walker Simon
NEW YORK, Nov 2 (Reuters) - The dollar sank to record lows against the euro and a basket of major currencies on Friday as fears of major losses at financial firms overshadowed a strong U.S. payrolls report.
Benchmark U.S. stock indexes fell as much as 1 percent dragged down by financial stocks, before retracing losses and erasing a brief dollar advance from a 166,000 gain in non-farm payrolls, the biggest jump in six months.
"There's fear over more skeletons falling out of the credit market closet," said Scotia Capital currency strategist Steve Malyon. "That overwhelmed any dollar-positive sentiment that might have been generated by the stronger-than-expected gains in the headline payroll number."
The euro <EUR=> hit an all-time high at $1.4528, according to Reuters data. It last traded at $1.4502, up 0.6 percent on the day, and has gained against the greenback in eight of the last nine sessions.
The dollar index (.DXY: Quote, Profile, Research), which charts the greenback's progress against a basket of six major currencies, fell as low as 76.220, its lowest level in its more than 30-year history. In mid-afternoon, it was trading at 76.337, off 0.34 percent.
Overall, U.S. stocks benchmark indices eked out meager advances at the close. But U.S. financial stocks closed 1.5 percent lower, led downward by a 7.9-percent fall by Merrill Lynch (MER.N: Quote, Profile, Research), stung by reports that it sought to delay billions of dollars of losses by shifting them to hedge funds.
In U.S. interest rate futures the implied probability of a December cut was 66 percent at the session close. Lower interest rates are dollar bearish since they spell reduced yields of deposits in dollars.
Turbulent trade in the dollar/euro could ease early next week, some analysts said, as traders adjusted positions ahead of Thursday's European Central Bank meeting.
The ECB was widely expected to hold rates at 4 percent, so investors would focus on ECB President Jean-Claude Trichet's press conference, said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"If he expresses need for strong vigilance against inflation, that would be a euro positive and if he says the ECB is adopting an accommodative stance, that would be a euro negative," he said.
As for the yen, Bennenbroek said he saw the next resistance level at 114 per dollar. The Japanese currency <JPY=> strengthened on Friday as the dollar eased 0.3 percent to 114.82 yen. For the week the dollar lost 0.7 percent against the yen.
The British pound <GBP=> gained about 1.7 percent in the week to a 26-year high, staging its largest weekly advance against the dollar since December 2006. On Friday, it rose 0.6 percent to $2.0906.
Most analysts see the Bank of England holding short-term rates steady at 5.75 percent at monetary policy meeting Thursday, with the bank delaying a rate cut until early 2008.
The Australian dollar <AUD=>, which hit a 23-1/2-year high on Wednesday, was poised to make another run upward on Nov. 6 when the Reserve Bank of Australia was widely expected to raise interest rates to an 11-year high of 6.75 percent.
The Australian currency Friday rallied 1.3 percent to $0.9232, nearing its mid-week peak of $0.9344.