The dollar fell below 100 yen for the second straight day and hit a record low against the euro after Bear Stearns said a worsening cash position had forced the Wall Street firm to secure emergency financing.
News that the New York Federal Reserve and J.P. Morgan Chase will provide funds for the fifth-largest U.S. investment bank signaled more credit turmoil to come and added to investor fears that the economy is in for a long recession.
"People are starting to talk about whether this is a signal of a systematic problem in the U.S. 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."
The dollar plunged to 99.58 yen, its lowest level in 12-1/2 years, before easing slightly, before easing to 100.20 yen. It was down 10 percent against the yen so far in 2008.
The euro hit $1.5688, an all-time high, before easing to $1.5613. And the dollar fell below parity with the Swiss franc for the first time ever, trading at 0.9987 francs, according to EBS, before easing to 1.0060.
And 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.
"It wouldn't surprise me if the Fed signals some more aggressive action or if something happens over the weekend," Salvaggio said. "And the dollar is going to bear the brunt of that. I think we very possibly could see the euro at $1.60."
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.
Futures markets are now pricing in a 38 percent chance that the Fed cuts benchmark interest rates next week by a full percentage point to 2 percent. Coming into the session, expectations were for a smaller cut to 2.25 percent.
Divyang Shah, a currency strategist at Commonwealth Bank in London, said the Fed may cut again after its March 18 meeting but added that "other scenarios should not be ruled out in the current environment."
U.S. economic data on Friday did no favors for the dollar, either. The Reuters/University of Michigan consumer sentiment index fell to a fresh multi-year low. A separate report showed underlying inflation unchanged in February.
"The Fed has turned a blind eye to inflation in hopes that slower growth would bring prices back in line, and this report allows it to maintain that policy," said Michael Woolfolk, currency strategist at the Bank of New York Mellon.
Coming into the session, talk that central banks could stage a coordinated effort to prop up the dollar for the first time in more than a decade had lent modest support to the U.S. currency.
But most analysts now say the need to boost market liquidity make intervening nearly impossible. Even Japanese officials, who are worried that a strong yen will hurt exports and undercut corporate profits, have stuck to verbal protests.
Japanese Finance Minister Fukushiro Nukaga said on Friday that excessive currency movements are undesirable, but conceded that recent moves reflect dollar weakness rather than yen strength.
Woolfolk said it would take "a material and sustained break of the dollar below 100 yen" to justify a move by Japan, either on its own or with other central banks.