The dollar fell to a record low versus the euro on Tuesday after the Federal Reserve cut its key interest rate by an aggressive half a percentage point to prevent the U.S. economy from weakening further on turmoil in the credit and housing markets.
Policy-makers reduced the benchmark lending rate between banks by the most since November 2002 to 4.75 percent, the lowest level since May last year. It was the first rate cut in four years. The Fed also lowered the discount rate it charges for direct loans to banks by a half-point.
Traders sold the dollar as lower rates make U.S. dollar-denominated assets less attractive. Financial markets had widely expected the Fed to lower overnight borrowing costs by at least 25 basis points, but were split over whether the move would be a more aggressive half-point.
"A 50 basis point cut in the funds rate and the discount rate is a brave opening gambit in the easing cycle from a Fed chairman that for credibility reasons was expected to err on the side of caution," said Alan Ruskin, chief international strategist at RBS Greenwich Capital, in Greenwich, Conn.
He said the move will also cause some to question the Fed's inflation-fighting credentials.
Against the dollar, the euro was 0.7 percent higher to trade at $1.3962, after earlier trading at a record high of $1.3977
"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed said in a statement outlining its decision.
Omer Esiner, a market analyst at Ruesch International in Washington, said, "The accompanying statement sounds a somewhat cautious tone, pointing out the Fed is a bit more worried about the fallout from the recent financial market turmoil."
The dollar fell nearly 1 percent against the Canadian dollar to trade at 1.0164, a 30-year low. Some analysts said recent oil price highs above $80 and lower U.S. interest rates may soon push the greenback to parity with its Canadian counterpart, a level last seen in 1976.
The high-yielding New Zealand dollar also rose 2 percent to $0.7205, while the Australian dollar was up 1.8 percent at $0.8490.