The dollar slumped heavily yesterday to a 15-year low against leading currencies on investor expectations that interest rate cuts by the US Federal Reserve will stoke inflation.
The dollar's weakness saw the euro soar above the psychologically important $1.40 level for the first time yesterday, raising fears about euro-zone exports and presaging fresh political opposition to further European Central Bank interest rates rises.
The US currency fell to its lowest level against a benchmark basket of top six currencies since 1992 on worries that higher inflation will erode the value of dollar assets.
The Canadian dollar rose to parity against the US dollar for the first time since 1976.
Tony Crescenzi, chief bond market strategist at Miller Tabak, said the magnitude of the dollar's decline qualified as "rapid and disorderly".
The intensifying weakness in the dollar came as Ben Bernanke, the chairman of the Federal Reserve, appeared on Capitol Hill and said that this week's 50 basis point cut in interest rates was needed to restore confidence and shore up the economy.
He said the Fed cut rates "to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy".
The Fed chairman added that "global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans", and the situation "has created significant market stress".
Hank Paulson, treasury secretary, told Congress that the Fed's decision to cut interest rates "helped to stabilise financial markets".
Mr Paulson also said that the Bush administration had enlisted international assistance to review the safety and soundness of the international banking system following the crisis in credit markets.
The testimony suggests the administration and federal regulators are stepping up their efforts to ease the credit squeeze following criticism by Democrats over their handling of the subprime mortgage crisis.
Markets remained nervous, however, and the Republic's biggest banks were hit again yesterday as jittery investors sought to sell their stock in both Dublin and London.
Anglo Irish Bank, one of the economic boom's biggest beneficiaries, saw €500 million wiped off its value over the course of the day.
The Republic's biggest bank, AIB, saw about €400 million wiped off its value as investors also deserted its stock.
Dealers described trade as weak and the Iseq index of Irish shares shed over 170 points to close at 7,794.7, the loss partly due to the banks' heavy weighting in the market.
