Dollar tumbles to record lows, recession risks mount

By Lucia Mutikani

NEW YORK (Reuters) - The dollar dropped to all-time lows against the euro and a basket of currencies on Wednesday after Federal Reserve Chairman Ben Bernanke signaled further interest rate cuts in the fight to avert a U.S. recession.

Risks of a contraction in the world's largest economy were again heightened by a report showing new U.S. single-family home sales fell in January to the lowest rate in nearly 13 years and housing inventories swelled, despite falling prices.

Adding to the gloom over the fragile U.S. economy, orders for long-lasting domestic manufactured goods recorded their biggest drop in five months in January, a government report showed.

That piled on the selling pressure for the dollar. Bernanke's reiteration that growth risks rather than inflation were the main focus for the U.S. central bank left investors anticipating another half-percentage-point cut next month.

"Clearly the risk (of a recession) is there and that's what the Fed is responding to. Markets are back to the theme of trading interest-rate differentials," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

The euro surged as high as $1.5143, according to Reuters data, the first time it has climbed above $1.51 in its nine-year history. It last traded at $1.5135, up 1.1 percent on the day.

The New York Board of Trade's dollar index, which charts the dollar's performance against a basket of currencies, dipped to a lifetime low of 74.070 <.DXY>. It last traded down 0.8 percent around 74.168.

HOPE NOT LOST ON DOLLAR

Despite the dollar's latest collapse, analysts are not losing hope just yet for the greenback's much-anticipated comeback in the second half of the year.

"This is not a close-your-eyes, buy-euro, sell-dollars-and-head to-the-beaches type of trade. It's significant we got to new highs and likely to close above the old high, but I am not anticipating a run on the dollar," said Gilmore.

"The euro zone has problems and the ECB is in denial about the potential slowdown in the euro zone, chasing imaginary inflation dragons," Gilmore said, referring to the European Central Bank. "It will run the risk of being late in the game of responding to slower growth, and the euro will pay the price for that."

With the Fed expected to lower the fed funds rate target by at least another full percentage point before the end of the current easing cycle, the euro could test $1.52-53 in the short-term, analysts predicted.

The Fed has cut its benchmark overnight lending rates by 2.25 percentage points to 3 percent since mid-September, while the ECB has kept its main rate at 4 percent.

"The Fed is going to err on the side of supporting growth at all costs," said Brian Dolan, chief foreign exchange strategist at Forex.com in Bedminster, New Jersey. "I am convinced they are prepared to ride through inflation well above their target for the rest of the year at the minimum,"

Rising prices for oil and other commodities are stoking inflation pressures, putting the Fed in a difficult position.

Rallying commodity prices helped drive currencies like the Australian dollar, which rose to a 24-year peak against the dollar of $0.9431, according to Reuters data. It last traded up 1 percent at $0.9426.

The New Zealand dollar jumped to a fresh 23-year post-float peak of $0.8213. Against the Canadian dollar, the U.S. dollar fell 0.3 percent to C$0.9801 . The euro, meanwhile, jumped to a record peak against the British pound of 0.7636, according to Reuters data.

(Additional reporting by Nick Olivari; Editing by Jonathan Oatis)

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