The dollar reached $1.41 against the euro and near-parity with the Australian dollar, while a rush to hedge against a weak US dollar sent gold prices to a record high.
Weakness in the dollar, the world’s reserve currency, could encourage other nations to devalue to keep their exports cheap by comparison.
The fall came as the US revealed that its trade deficit widened 8.8 per cent to $46.4bn (£29bn) in August, driven by a record level of Chinese imports.
The Chinese yuan then reached 6.65 against the dollar, its strongest closing level since July 2005. The new high fuels US arguments that China is unfairly keeping its currency cheap to support its exports abroad.
The UN warned yesterday that any instability in the currency market has the potential to wreck the fragile recovery of global trade.“We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war,” said James Zhan of the UN’s trade body.
Traders have flocked to sell the dollar since Tuesday, when the US Federal Reserve gave a strong indication that it was prepared to restart quantitative easing to kickstart the flagging economy.