Dollar hits new lows as stocks dive

NEW YORK (Reuters) - The dollar tumbled to a record low against the euro on Wednesday after comments by a Chinese official stoked fears the central bank of the world's fourth-largest economy would reduce its holdings of U.S. assets.

The dollar's decline was broad. It tumbled to record lows against a basket of major currencies as sentiment darkened further after General Motors Corp GM.N posted its biggest quarterly loss ever.

That loss, coupled with warnings of potential credit-related write-downs from major financial institutions, kept alive expectations that the Federal Reserve could cut interest rates again next month.

The dollar also sank against the Swiss franc and the yen as the U.S. stock market dived almost 3 percent. That unnerved "carry trade" currency investors, moving them to repay low-interest loans in Swiss francs and yen used to make high-stakes foreign exchange bets.

"The dollar has fallen sharply today, with the trigger a comment by a Chinese political leader about allocation of reserve assets into stronger currencies," said Robert Sinche, head of market strategy at Bank of America.

"There is little prospect for near-term clarity in the U.S. financial system risk, Fed policy is biased to neutrality or ease, and selling the dollar ... has become almost a one-way bet. These factors increase the prospect of a more serious dollar downside," he added.

The euro raced to an all-time high of $1.4730, according to Reuters data, before retreating to $1.4638, still up 0.6 percent against the dollar on the day.

Against the yen, the dollar fell 1.7 percent to 112.77 yen. It fell 1 percent against the Swiss franc CHF= to 1.1337 francs.

The New York Board of Trade's dollar index .DXY, which measures the dollar's value against a basket of six major currencies, fell to a record low of 75.077. It last traded down 0.6 percent at 75.546.

EURO TO $1.50?

The next big euro move could hinge on European Central Bank President Jean-Claude Trichet's news conference on Thursday following the bank's monetary policy meeting, at which the ECB is widely expected to hold its benchmark interest rate at 4 percent.

Any hawkish signal from Trichet hinting at rate rises down the road are seen spurring a renewed rally of the euro. At the same time, any hint of concern over the euro surge could send the currency substantially downward, at least in short-term trading.

"Hawkish comments from Trichet will put the euro on a trajectory to 1.50 to the dollar," said John McCarthy, director of foreign exchange trading for ING Capital Markets in New York. "If he expresses concern over the euro's sharp rise, then we'll see a temporary sell-off."

But the broader trend is for the euro to hit $1.50 one way or another, one factor being that no ECB or U.S. Treasury officials have spoken out to "jawbone" down the euro and reverse dollar weakness, McCarthy said.

The euro jumped nearly 2 cents to its peak early on Wednesday soon after a Chinese central banker said the dollar was losing its major global currency status and a top lawmaker said China should balance the make-up of its $1.43 trillion foreign reserves to take advantage of appreciating currencies.

Another major gainer was the British pound ahead of Thursday's Bank of England monetary policy committee meeting, which is expected to keep interest rates at a six-year high.

Sterling jumped to a 26-year high of $2.1071. It last traded at $2.1022, up 0.7 percent on the day.

The divergent paths of interest rate policy in the United States and Europe are the prime drivers of dollar weakness. Since September, the Fed has cut benchmark rates by three-quarters of a percentage point to 4.5 percent, while the ECB and BoE have held rates steady after hiking them earlier in the year.

Higher interest rates are a magnet for inflows to higher-yielding deposits, favoring high-rate currencies.