The euro vaulted to a record high versus the dollar on Tuesday as concern about the health of the U.S. financial sector overshadowed a series-low reading of German investor sentiment.
The dollar's slump came just two days after the U.S. government had tried to reinstate market confidence with a rescue package for mortgage agencies Freddie Mac and Fannie Mae.
Although the measures were originally seen as a positive, investors quickly refocused on their potential cost and on the fact that the very offer of the rescue package signaled that things in the sector had got pretty bad.
In such an environment, the euro's rally was only very briefly dented by a bigger than forecast slump in the German ZEW investor expectations index to a series low of -63.9 in July.
Within 20 minutes of the dour release the euro had regained its poise to surge above April's record high versus the dollar.
"What outweighs the (ZEW) at the moment is concerns about how the U.S. economy will do in the second half of the year, and general lack of confidence in the dollar and the U.S. financial sector," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt. "Overall the dollar should remain weak."
The euro rose as high as $1.6038 according to Reuters data, before trimming gains. The greenback fell against a basket of six major currencies to a 3-month low of 71.320.
Tumbling stock markets in Asia and Europe also sent investors towards the safe-haven Japanese yen.
The dollar fell versus the yen,while the euro eased against the Japanese currency.
Bernanke's Fine Line
Next, focus turns to U.S. retail sales and producer prices data at 1:30 pm London time followed by Fed Chairman Ben Bernanke's testimony before Congress at 3 pm.
The dollar's record low versus the euro will pose an additional headache for the central bank chief who is trying to balance inflationary pressures -- exacerbated by a weak currency -- with a slowing economy.
"Bernanke will try to walk the fine line between the need for price stability ... versus aid for financial markets. While he may try to opt for a hawkish line today, we would sell into any USD strength, betting that the Fed will not hike rates before the election," ING said in a note to clients.
Elsewhere, the Australian dollar hit a 25-year high against the U.S. dollar of $0.9811 after minutes of the Reserve Bank of Australia's July meeting showed the central bank remained concerned about inflation, suggesting it will likely keep rates at a 12-year high and may even hike again.
The U.S. currency also fell below parity to the Canadian dollar for the first time in 1-1/2 months ahead of a Bank of Canada rate decision at 1 pm.
Policy is widely seen on hold at 3 percent, but some analysts expect a hawkish statement.