Dollar dives to record low vs euro, curbs losses on oil

U.S. dollar bills are displayed in Toronto March 26, 2008.

NEW YORK (Reuters) - The dollar fell to a record low against the euro on Tuesday amid persistent fears over the health of the U.S. financial institutions, with Federal Reserve Chairman Ben Bernanke giving a grim assessment of the sector.

But crude oil's largest price drop in 17 years briefly diverted investors' attention away from the troubles in the financial sector, helping the dollar to pull back from the historic troughs and regain some ground versus the yen.

Bernanke told the Senate Banking Committee that financial markets and institutions remained under "considerable stress" and restoring stability was a top priority for the central bank.

Separately, U.S. Treasury Secretary Henry Paulson testified before the committee that distressed housing finance giants Freddie Mac FRE.N and Fannie Mae FNM.N had potential to pose systemic risks to the financial system.

"Oil came off substantially today, which was a huge boost for everything dollar-related," said Boris Schlossberg, senior currency strategist at DailyFX in New York.

"We don't think the storm has passed, authorities are just putting out one fire after the other. As soon as risk aversion returns back to the market, the euro will resume its safe haven bid status," he said.

The euro jumped to a record peak of $1.6037, according to Reuters Dealing data EUR=D2. In late New York trade, the euro was flat at $1.5902.

The dollar got a brief boost from a surge in Wall Street stocks as oil dropped as much as $9.26 a barrel on speculation sluggish U.S. economic growth could curtail demand. But renewed financial worries took the steam out of the U.S. stock market rally as the Dow Jones industrials ended below 11,000 for the first time since July 2006.

Against a basket of six currencies, the dollar fell to a three-month low of 71.314 .DXY, but later recovered to around 71.746, down about 0.3 percent on the day.

Sagging global stock markets sent investors toward the safe-haven Japanese yen. The dollar fell as low as 104.17 yen, its third consecutive day of declines. It last traded at 104.76 yen, down 1.3 percent. The euro fell 1.4 percent to 166.55 yen.

Analysts said the mood for the dollar remained grim as investors fretted that the credit crunch, sparked by the U.S. housing market crisis, still had a long way to go.

"(There is) no end to dollar negative sentiment and the inclination to sell any dollar upticks, notably against the most obvious 'flight-to-quality' plays, the Swiss franc and the yen," said Alan Ruskin, chief strategist at RBS Global Banking & Markets in Greenwich, Connecticut.

Elsewhere, the Australian dollar hit a 25-year high against the U.S. dollar of US$0.9851, according to Reuters Dealing, after minutes of the Reserve Bank of Australia's July meeting showed the central bank remained concerned about inflation.

This suggested 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 CAD=. It last traded at C$1.0014, down 0.5 percent after the Bank of Canada left its benchmark rate unchanged at 3 percent.

(Additional reporting by Nick Olivari; editing by Gary Crosse)