The dollar plummeted to record lows and shares tumbled in New York and across Europe yesterday after Ben Bernanke, the Chairman of the Federal Reserve, spooked markets with a prediction of US bank failures and fresh warnings over a grim outlook for America’s economy.

In its third day of heavy losses, the embattled dollar slumped across the board on foreign exchanges after Mr Bernanke gave what economists said was a “green light” to markets to step up their assault on the US currency.

The dollar fell to a new record low against the euro, which soared to levels above $1.52 for the first time, while the dollar’s overall value on its trade-weighted index also hit a record low for a third consecutive day.

The greenback’s heavy losses combined with the latest dose of bleak US figures, with confirmation that the US economy came close to stagnating in the fourth quarter, to spark another fear-fuelled sell-off on Wall Street.

Leading US shares sank by 1 per cent or more in morning trading. Equity markets in Europe also endured still more steep losses, with London’s FTSE 100 index ending the day down 110.8 points, or 1.8 per cent.

The Dow Jones industrial average closed down 112.10, to 12,582.20.

The slide in US shares also fed back to currency markets to further ratchet up pressure on thedollar.Analysts laid the blame squarely at the Fed Chairman’s door. They said markets had seized on his signals of further cuts in US interest rates, concern over the Fed’s difficulties in bolstering growth, and his tacit acceptance of a weaker dollar and its boost for US exports.

Addressing the Senate Banking Committee, Mr Bernanke rejected suggestions that the US economy could succumb to a bout of Seventies-style stagflation, with soaring inflation and stagnant growth. “I don’t anticipate stagflation,” he said.

But he fuelled markets’ unease by acknowledging that inflationary pressures were “complicating” the Fed’s ability to underpin growth.

“We are facing a situation where we have simultaneously a slowdown in the economy, stress in the financial markets, and inflation pressure coming from these commodity prices abroad,” he said.

The Fed chief responded to questions on the dollar’s slide by saying: “We obviously watch the dollar very carefully”, but expressed no concern.

David Bloom, currency strategist at HSBC, said Mr Bernanke had signalled that the Fed was content for the dollar to fall and buoy American trade, despite its impact in stoking price pressures from dearer imports.

“That was seen as a green light that the Fed is happy with a weak dollar and not worried about inflation as much,” he said.

And in what Mr Bloom described as a “coup de grâce” to the dollar, Mr Bernanke predicted that some smaller US banks were likely to collapse. “I expect there will be some failures,” he told the committee.

However, he added: “Among the largest banks . . . I don’t anticipate any serious problems of that sort.”

With credit markets in a state of seizure, and equity markets gripped by severe volatility, Mr Bloom said investors were assailing the dollar to capitalise on its increased vulnerability. “The easiest way to make money at the moment is to close your eyes and sell dollars,” he said.

Mr Bernanke’s blow to sentiment came even as President Bush reiterated Washington’s mantra: “We believe in a strong dollar policy.” The President added: “I don’t think we’re headed to a recession.”

The Fed’s challenge was underlined by revised GDP data that showed that US growth in the final quarter of last year was a meagre 0.6 per cent at an annual rate, marking a collapse from the boom-like 4.9 per cent expansion in the previous three months.

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