The embattled dollar succumbed to still deeper losses yesterday as another bout of grim US economic news and the emergency rescue of Bear Stearns fuelled fears over American prospects and further flight from the greenback.

Pressure on the dollar was ratcheted still higher by intense speculation in markets that the rapidly deteriorating US outlook will lead the Federal Reserve to cut American interest rates today by a full percentage point.

A cut on this scale would lower US official rates to only 2 per cent, their lowest since the end of 2004, widening the gap with 4 per cent eurozone rates to its largest for more than six years and further undermining the dollar’s appeal to footloose flows of international “hot money”.

In its latest plunge, the dollar fell to fresh 12½ year lows against the yen, at Y95.77, while the euro was propelled to record levels above $1.59, reaching a high of $1.5904.

The euro’s latest surge came on top of gains of about 4 per cent against the dollar in the past two weeks alone and also saw it reach a record 79.12p against the pound, up more than 1 per cent on the day.

The managing director of the International Monetary Fund, speaking in Paris, sounded an apparent warning over the scale of the dollar’s losses, while highlighting the weakness of the Chinese yuan and Japanese yen, while the euro bore the brunt of the dollar’s slump.

Dominique Strauss-Kahn said: “The whole monetary system is starting to become stretched now, with, on the strong side, the euro, and clearly on the weak side the Chinese and Japanese currencies, and between the two the dollar.

“For a long time the dollar was in a situation where its downward movement was predictable. We are now in a situation that is more stretched . . .”

The dollar’s latest losses were fuelled by a further spate of bleak US economic figures. Official US Treasury data emphasised the dollar’s vulnerability to America’s vast current account deficit, with the capital inflows needed to finance this falling short of requirements in January.

Net overall capital flows into the United States fell sharply to $37.4 billion in January, from $72.7 billion in December, making them insufficient to cover the monthly US trade gap of $58.2 billion.

Other figures did show that the current account deficit fell back in the final quarter of last year, dropping below 5 per cent of GDP for the first time in almost four years.

The deficit fell to $172.9 billion in the quarter, from a revised $177.4 billion in the previous three months. Yet the good news was tempered as the improvement was driven by a large drop in the income on US assets sent abroad to foreign investors.

US industrial production tumbled by 0.5 per cent last month, in worse than expected figures that marked its sharpest fall since October.

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