The European single currency surged to an all-time high against the dollar on Wednesday, striking 1.3879 dollars as investors bet on falling US interest rates, dealers said.
The euro surged in early trade to 1.3879 dollars -- the highest level since its creation in 1999 and beat the old record of 1.3852 dollars set on July 24.
The single currency had flirted with the previous high point since Tuesday evening and burst above it at 7:20 am (0520 GMT), before pulling back slightly.
In recent days, the dollar has been hit by poor US economic indicators and increasing talk among analysts about the possibility of a recession in the United States.
Next Tuesday, the US Federal Reserve is set to cut US borrowing costs from 5.25 percent -- while the European Central Bank is forecast to lift eurozone borrowing costs in the coming months to at least 4.25 percent, dealers said.
Widening interest rate differentials mean that currency investors can reap higher returns from the euro rather than the struggling dollar.
"The dollar is under significant pressure....the main drivers of dollar weakness appear to be collapsing short-term interest rate differentials as markets look to a series of reductions in the Fed funds rate and a related rise in risk appetite," said HBOS analyst Steve Pearson on Wednesday.
The euro was also supported by comments from ECB chief Jean-Claude Trichet, who said Tuesday that major European banks were not acutely affected by the recent turmoil in credit markets, dealers said.
Investors understood those comments to signify the central bank will retain its monetary tightening bias for further rate hikes, dealers said.
"Investors have increased sentiment that the US economy is entering a recession and against that interest rates in Europe are expected to rise further," said Kazuhiko Shibata, Tokyo branch manager of Dresdner Bank.
Expectations of a Fed rate cut were cemented by Friday's news of a surprise fall of 4,000 in US non-farm payrolls in August. That added to fears that a sharp downturn in the US housing market was infecting the broader economy.