The euro rose to a record high against the dollar today on the back of US concerns that its housing sector could necessitate rate cuts at a time when other central banks are tightening policy.
The dollar tumbled to new lows against the euro today.
The euro climbed to a historic high of $1.3833 before trimming gains to stand at $1.3784 earlier today.
The dollar also hit a 26-year trough against sterling, pressured by news that Bear Stearns had said two of its hedge funds that bet heavily on subprime loans had "very little value".
With yield differentials in focus, investors are also looking for further clues on the US rates outlook from US consumer prices data for June due later today and congressional testimony by Federal Reserve Chairman Ben Bernanke this afternoon.
Any comments from Mr Bernanke on troubles in the subprime mortgage market - which caters for borrowers with a troubled credit history - could be key.
"The focus will be on Bernanke's comments," said Tom Levinson, FX strategist at ING. "He won't be able to ignore the subprime issue and he is likely to say the economy can cope with it but investors will look to see if comments pop out under questioning that could scare the market."
Against a basket of six major currencies, the dollar fell as low as 80.227 - the weakest since April 1995.
Sterling rose as high as $2.0548, - its strongest since 1981 - ahead of Bank of England minutes earlier in the session.
Sterling pared some of these gains after the minutes showed three of the Bank's nine-strong Monetary Policy Committee voted against a July rate hike, in line with expectations but perhaps not the aggressive vote to raise rates some had expected in the light of Tuesday's firm inflation data.
The dollar was flat against the yen at 122.13.
"The dollar is under pressure, that's the story. Spreads are moving against the dollar and it's only a matter of time before we hit $1.40 in euro/dollar and $2.06 in (sterling/dollar)," said Martin McMahon, FX strategist at Credit Suisse in Zurich.
The implied spread between December euro-dollar and Euribor futures has fallen to 74 basis points in favour of the dollar now from 87 basis points a month ago, while US-euro zone government bond yield differentials have also compressed.
The dollar suffered a blow after Bear Stearns made the announcement about its two hedge funds in a letter to investors on Tuesday, giving a boost to Treasuries in Asia trade.
Today's data could add to the dollar's troubles. Core US consumer prices are seen rising 0.2 per cent in June, keeping the annual rate of inflation stable at 2.2 per cent.
Headline inflation though - which includes rises in food and energy costs - is expected to pick up to 2.4 per cent. With the spotlight on the US housing market, June building permits and housing starts figures will also be studied.