The dollar hit a fresh record low against the euro and a basket of currencies on Friday, pressured by the growing view that a slowdown in the U.S. economy will force another cut in interest rates this month.
Traders also sold the U.S. currency ahead of a meeting of the Group of Seven finance ministers and central bankers in Washington. There has been some speculation that their statement late on Friday could address the dollar's weakness and other currency imbalances.
But most analysts do not expect the G7 to change its message on currencies, and say the greenback should be free to continue its downward trend once the meeting is over.
Weak U.S. data, coupled with poor results from several heavyweight U.S. banks, have fueled expectations of a growth-boosting but dollar-negative rate cut from the Federal Reserve on Oct. 31.
"The combination of weak data this week and poor results by some of the U.S. largest banks, helped push the dollar to a new record low in Asian trading," said Matthew Strauss, senior currency strategist with RBC Capital Markets in Toronto. "Now, investors are squaring those positions ahead of the G7 statement later today."
By late morning trading in New York, the euro reverted, having hit a lifetime high of $1.4319 in the Asian session, according to Reuters data.
Comments by Canadian Finance Minister Jim Flaherty on Friday repeating he wouldn't be surprised if the G7 issues a stronger statement on China's currency exchange policy helped drag the euro lower versus the yen and also against the dollar, traders said. The euro last traded 0.6 percent lower at 164.15 to the yen.
The dollar index, a measure of its value against six major currencies, traded almost flat at 77.604 but earlier in Asia hit 77.406, its lowest ever since its inception over 30 years ago after the Bretton Woods exchange rate agreement broke down.
A decrease in U.S. housing starts to 14-year lows, soft regional manufacturing data, a steep rise in the number of weekly jobless claims and a 32 percent fall in quarterly earnings from Bank of America this week all helped lift the implied chances of a Fed rate cut on Oct. 31 to around 76 percent in interest rate futures markets.
"The dollar's gloom continues ... At this point we believe that a new rate cut, probably of 25 basis points, will be announced at the end of the month," said Roberto Mialich, FX strategist at UniCredit in Milan.
If the dollar was the main loser from the shift in rate expectations, with U.S./euro zone yield differentials now at their narrowest in over three years, the low-yielding yen was the biggest beneficiary from the rising risk aversion.
The yen rose to a three-week high of 114.85 per dollar on caution ahead of the G7 meeting and as U.S. stocks sold off. But it then pared some of it gains back to 115.01.
"At present a dollar recovery seems outside the realms of possibility. We therefore think that in the short-term new all-time highs in euro/dollar at $1.4350 and above are possible," currency analysts at Commerzbank Corporates & Markets said in a research note.