The dollar extended its fall against the yen Wednesday, dropping to session lows as U.S. stocks deepened losses after a surge in oil prices.
The dollar fell to an intraday trough of 101.81 yen and stayed lower on the day. The euro traded higher versus the dollar, after scaling a session high of $1.5812.
This is in sharp contrast to expectations for further inflation-busting talk from the European Central Bank when it meets to decide on euro zone interest rates Thursday.
Minutes of the March 18 Federal Open Market Committee (FOMC) meeting revealed on Tuesday that members believed a prolonged and severe economic downturn could not be ruled out, citing tighter credit conditions and the housing sector slump.
"The dollar is taking a softer tone following a reassessment of the odds of a 50 basis points interest rate cut. (But) we are chopping around yesterday's trading range," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.
Interest rate futures, which measure market sentiment toward Fed monetary policy, are pricing in a roughly 44 percent chance that the federal funds rate would be cut by another half percentage point at the April 29-30 meeting.
Since mid-September, the Fed has lowered its benchmark overnight lending rate by 3 percentage points to 2.25 percent, erasing the dollar's yield advantage over the euro.
The ECB has kept its refinancing rate at 4 percent.
Robust Euro Zone Economy
Despite data earlier confirming that euro zone economic growth had slowed in the last quarter of 2007, investors were still contrasting a relatively robust euro zone economy with an ailing United States in the grip of a major slowdown.
"When the FOMC minutes came out, they were a lot more dovish than some people would have expected," UBS currency strategist Geoffrey Yu said from Zurich.
"The market is not too convinced on the euro zone but you are being forced to choose between the lesser of two evils right now. People are still preferring to chase the euro higher rather than the dollar."
The ECB is expected to keep rates unchanged after its policy meeting, with analysts' attention focused more on the news conference following it.
The euro hit a record high of 80 pence early in the European session before pulling back slightly, but remained up on the day against the UK currency.
This came as UK consumer morale fell and an IMF downgrade to growth stoked debate on how aggressively the Bank of England might cut rates after its policy meeting on Thursday.
Investors were also focusing on an upcoming meeting of G7 finance officials in Washington starting on Friday to see whether delegates will show a united front on efforts to quell ongoing problems in credit markets.
The International Monetary Fund said on Tuesday that turmoil in credit markets could spread with losses possibly approaching $1 trillion.
The Bank of Japan held rates at 0.5 percent on Wednesday and lowered its economic outlook, while Governor Masaaki Shirakawa said that nations should take steps to deal with the financial market turmoil that best suit their respective economies.
Currency markets also digested reports that Citigroup was close to a sale of leveraged loans and bonds to a group of private equity firms.
Despite some recent signs of stabilization, concerns about the fallout from the credit market turmoil were likely to linger ahead of quarterly earnings announcements by U.S. banks later this month, traders said.