THE US dollar sank below 99 yen, to the weakest level in 12 years, and slumped to a record low versus the euro after JPMorgan Chase and the New York Federal Reserve bailed out Bear Stearns, as credit market losses widen.
The US currency also plunged to below one Swiss franc for the first time as traders speculated the Fed will slash interest rates one percentage point next week to avert a recession.
As investor confidence tumbled, stocks plunged and gold climbed to a record high of $1,009 an ounce.
"The initial reaction is to sell the US, sell the dollar, sell the equities," said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products.
"This is bad news. It's definitely a confirmation of the reality that US financial institutions are having a hard time."
The dollar sank to 98.90 yen, the lowest since September 1995. It traded at 99.32 yen at 4pm from 100.65 late Thursday.
The US currency plunged to $1.5688 against the euro, the weakest since the European currency's 1999 debut.
"People are starting to talk about whether this is a signal of a systematic problem in the US banking sector, and that's why we're seeing selling of dollars across the board," said Greg Salvaggio, a currency trader at Tempus Consulting in Washington.
The question on traders' minds now, said Omer Esiner, a market strategist at Ruesch International in Washington, is "which of the other big firms out there need similar funding".
Analysts said the dollar is likely to remain on the ropes because the Fed may have to do much more to ease market nerves, either by cutting interest rates even more aggressively or by taking additional measures to inject liquidity.
Futures markets are now pricing in a 38 per cent chance that the Fed cuts benchmark interest rates next week by a full percentage point to 2 per cent. Coming into the session, expectations were for a smaller cut to 2.25 per cent.
In addition to rescuing Bear Stearns, the Fed this week announced plans to lend $200 billion to primary dealers and accept various mortgage debt as collateral.
- (Bloomberg /Reuters)
