The euro fell below $1.28 for the first time since November 2006 and the pound tumbled to a five- year low on speculation Europe's central banks will cut interest rates as the global economy heads for a recession.
The single European currency also slid to the weakest in more than four years versus the yen as global stocks declined, encouraging investors to sell higher-yielding assets and pay back low-cost loans in Japan. The pound dropped to a one-week low versus the euro after Bank of England Governor Mervyn King said the U.K. is probably in a recession.
``The market came to realize that many more rate reductions are needed in Europe,'' said Robert Blake, a strategist in Boston at State Street Global Markets LLC, which has $15.3 trillion in assets under custody. ``Dollar repatriation has much further room to run.''
The declines caught companies investing in currency derivatives, or financial instruments derived from stocks, bonds, loans, currencies and commodities, on the wrong side of the trade.
The euro extended losses today on speculation efforts by global governments and central banks to revive credit markets will fail to avoid a worldwide recession.
``I am short on the euro-dollar,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``It's a strong trend. It's more about psychology than fundamentals.''
U.S. investors have repatriated about $60 billion of the nearly $1 trillion in foreign stocks and bonds purchased since 2003, leaving an ``enormous pool of capital'' that may flow back into the U.S. and bolster the dollar, according to a Oct. 16 note by Citigroup.
The British pound fell for a fourth day against the greenback after a report yesterday showed U.K. manufacturing confidence dropped to its weakest level in almost three decades.
``It now seems likely that the U.K. economy is entering a recession,'' BOE Governor King said in a speech to executives in Leeds, England, yesterday. ``The balance of risks to inflation in the medium term shifted decisively to the downside.''
Policy makers voted unanimously to lower the benchmark U.K. interest rate by a half-percentage point to 4.5 percent in an emergency meeting on Oct. 8, according to minutes of the decision released by the Bank of England today in London. The nine-member Monetary Policy Committee said the economy had ``deteriorated substantially,'' which would slow inflation from more than double the 2 percent target.