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NEW YORK The dollar fell below 99 yen and hit a record low against the euro after Bear Stearns said a worsening cash position forced the Wall Street firm to secure emergency financing.
News that the New York Federal Reserve and J.P. Morgan Chase were to provide funds for the fifth-largest U.S. investment bank signaled more credit turmoil to come and added to investor fears that the economy is in for a long recession.
"People are starting to talk about whether this is a signal of a systematic problem in the U.S. banking sector, and that's why we're seeing selling of dollar across the board," said Greg Salvaggio, currency trader at Tempus Consulting in Washington.
The question on traders' minds now, said Omer Esiner, a market strategist at Ruesch International in Washington, is "which of the other big firms out there need similar funding."
The dollar plunged to 98.91 yen JPY=, its lowest level in 12-1/2 years, before edging back to 99.310 yen, down 1.1 percent. It was down nearly 11 percent against the yen so far in 2008.
The euro hit $1.5688 EUR=, an all-time high, before easing to $1.5669, up 0.2 percent. The dollar fell below parity with the Swiss franc for the first time ever, trading at 0.9976 francs, according to EBS, before easing to 0.9984 francs
Analysts said the dollar is likely to remain on the ropes because the Fed may have to do much more to ease market nerves, either by cutting interest rates even more aggressively or by taking additional measures to inject liquidity
"It wouldn't surprise me if the Fed signals some more aggressive action or if something happens over the weekend," Salvaggio said. "And the dollar is going to bear the brunt of that. I think we very possibly could see the euro at $1.60."
In addition to providing funds to Bear Stearns, the Fed this week announced plans to lend $200 billion to primary dealers and accept various mortgage debt as collateral.
Futures markets are now pricing in a 50 percent chance that it cuts benchmark interest rates next week by a full percentage point to 2 percent. Coming into the session, expectations were for a smaller cut to 2.25 percent.
Divyang Shah, a currency strategist at Commonwealth Bank in London, said the Fed may cut again after its March 19 meeting but added that "other scenarios should not be ruled out in the current environment."
U.S. economic data on Friday did no favors for the dollar, either. The Reuters/University of Michigan consumer sentiment index fell to a fresh multi-year low. A separate report showed underlying inflation unchanged in February.
"The Fed has turned a blind eye to inflation in hopes that slower growth would bring prices back in line, and this report allows it to maintain that policy," said Michael Woolfolk, currency strategist at the Bank of New York Mellon.
Coming into the session, talk that central banks could stage a coordinated effort to prop up the dollar for the first time in more than a decade had lent modest support to the U.S. currency.
But Japanese officials, who are worried a strong yen will hurt exports and undercut corporate profits, have so far stuck to verbal protests rather than intervene to weaken the yen.
Next week, markets will focus on the subprime crisis and Tuesday's Fed meeting.
"The only real question is how aggressively the Fed cuts on Tuesday. While the data might warrant a larger move, we are calling for a 75-bp cut, in line with the futures strip," said CIBC World Markets in Toronto.
It added that a restraining factor is still inflation. "The market breathed a sigh of relief at Friday's CPI, but strong oil prices and the dollar's weakness point to less cheery numbers ahead."
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Richard Satran)