The euro hit a new record high against the dollar this morning on trading at $1.2687.
The dollar lost ground against most major currencies after a top Federal Reserve official reinforced market views that US interest rates will remain low for some time.
Governor Mr Ben Bernanke said late last night the Fed was right to hold interest rates at 45-year lows given the low rate of inflation.
The prospect of continuing low US rates is seen as encouraging outflows to other higher yielding currencies, adding to investor doubts about the United States' ability to fund its current account gap at a time when economic growth is likely to lead to higher imports.
The greenback fell as low as $1.2695 per euro, before paring losses to $1.2645. It hit seven-year lows against the Swiss franc below 1.2300 and against a basket of currencies .
The dollar's losses were limited against the yen due to suspected intervention by the Japanese authorities on the first trading day of 2004 in Tokyo. It stood at 106.95, above last week's three-year low.
Mr Bernanke also said it was a mistake just to look at the dollar's sharp drop against the euro, adding the dollar's fall against a broad basket of currencies had been much smaller. He said the risk of a "dollar crisis" was low.