The euro rallied on Thursday to above $1.40 for the first time since February on persistent concerns over the U.S. economy's outlook which may lead to fresh stimulus measures from the Federal Reserve.
The European single currency rose to $1.4029, also after the European Union warned that its recent strength could undercut economic recovery and the IMF head highlighted the threat of a destabilising currency war.
The comments come against a background of mounting concern that countries seeing their economies slow will each try to devalue their currencies to boost their exports.
Against the Japanese currency, the dollar slumped to 82.25 yen — the weakest level since May 1995 and below the level which triggered Japanese government intervention in the foreign exchange market on September 15.
The dollar's tumble, meanwhile, allowed gold to strike yet another record high, this time at $1,364.77 an ounce as investors sought safety.
Traders also digested comments from International Monetary Fund head Dominique Straus-Kahn, who said he took the threat of a currency war “very seriously” and would do all he could to prevent one. In an interview with Le Monde newspaper and ahead of the annual IMF meeting in Washington opening on Friday, he said: “I take very seriously the threat of a currency war, even if it just a latent (threat). “We have to prevent it; the IMF will put forward proposals to that end,” he added.
His comments come against a background of mounting concern that countries seeing their economies slow will try to devalue their currencies to boost their exports. A competitive series of undercutting devaluations could mean a repetition of the ‘beggar-thy-neighbour' policies of the 1930s, considered to have greatly exacerbated the Great Depression.
A key bone of contention is China, which the U.S.and Europe say, keeps its currency deliberately undervalued to bolster its exports at their expense. Also on Thursday, the Australian dollar hit a record high against the U.S. unit and tested parity with the greenback for the first time.
The breakthrough came on the back of a surge in new jobs in Australia, which raised expectations that the country's central bank would lift interest rates from 4.50 per cent to curb inflation.
The British pound also jumped against the dollar. The Bank of England held interest rates at a record low level of 0.50 per cent on Thursday for the 19th month running, as it struggles to nurture recovery, but opted against pumping out more cash. The British central bank announced the latest decisions in a brief statement after a two-day gathering of its nine-member Monetary Policy Committee (MPC).