NEW YORK The dollar tumbled to a record low against the euro on Thursday and hit parity with Canada's currency for the first time since 1976 as investors braced for further Federal Reserve interest rate cuts after this week's sharp reduction.
The sell-off started in Europe and continued in New York as investors and analysts concluded lower benchmark rates in the world's largest economy will diminish returns on dollar-denominated assets, denting the greenback's appeal.
That view also weighed on other U.S. assets as Treasury debt prices fell and the three main U.S. stock indexes slipped.
The dollar breached the key $1.40-per-euro level, stopping just shy of $1.41 around noon in New York before retracing some of its gains. The euro zone single currency also rose above 70 pence against sterling for the first time in one and a half years.
The Canadian dollar briefly reached parity with the U.S. dollar for the first time in 31 years, supported by lofty commodity prices, a strong domestic economy and concerns about a U.S. economic slowdown. The dollar fell 1.4 percent against the Canadian dollar and last traded around C$1.0009.
The Fed on Tuesday slashed rates by half a percentage point to 4.75 percent -- the first cut in four years -- to shield the U.S. economy from a deepening housing slump and credit market turbulence.
"People are convinced the Fed will have to cut by more than 50 basis points," said Matthew Strauss, senior foreign exchange strategist at RBC Capital Markets in Toronto. The dollar's sell-off "is a continuation of selling seen after the Fed's rate cut, and with the dollar index closing in on all-time lows, people are looking for reasons to target that level."
In late afternoon trading in New York, the euro had risen to a record high of $1.4099 before surrendering some gains to trade up 0.7 percent on the day at $1.4071. The dollar was down 1.5 percent against the yen to trade at 114.30 per dollar JPY=, on track for its biggest one-day percentage decline in two weeks.
The dollar set a 15-year low against a basket of six major currencies, at 78.45 .DXY, in its biggest one-day drop against the dollar index in more than a year. A move below 78.190 would take the index to record lows.
The dollar touched a two-and-a-half-year low against the Swiss franc and last traded at 1.1711, down 1 percent from late Wednesday.
Fed Chairman Ben Bernanke warned Congress on Thursday that raising the ceiling on the size of loans that government-sponsored mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N can buy could undermine market discipline.
He also said that soft home prices and mortgage rate resets mean that subprime adjustable-rate home loan delinquencies will rise further.
"It's pretty clear (Bernanke) expects more weakness in the housing sector, but the fact that he says the market is self-correcting leads me to believe he expects the system to work itself out without too much help from the Fed," said Dustin Reid, senior currency strategist at ABN AMRO in Chicago.
Of the euro move, Reid said, "It's uncharted territory, and when you're in uncharted territory, it's difficult to look at every little wobble in price and try to attribute it to a specific event or fundamental."
Sterling edged higher against the dollar after Bank of England Governor Mervyn King said that cutting interest rates at first sight of every problem was not the way to go. Sterling/dollar rose 0.5 percent to $2.0093.
(Additional reporting by Steven C. Johnson and Nick Olivari)