Analysts said a recent run of weak US data had seen markets fully price in a 25 basis-point cut in US interest rate after the Federal Reserve’s policy meeting on Wednesday.
The dollar dropped 0.3 per cent to a low of $1.4438 against the euro, while the dollar index, which tracks its value against a basket of six leading currencies fell to 76.777, its weakest level since the Federal Reserve launched the data series in 1973.
The dollar also fell 0.4 per cent to $2.0615 against the pound, within half a cent of the 26-year low of $2.0655 it hit in July.
Traders said as well as general dollar weakness, the pound was lifted as expectations of UK monetary easing were cut back following report in the Financial Times which said UK average earnings might be rising faster than official statistics had reported.
Meanwhile, soaring oil prices, which rose to fresh record levels on Monday, pushed the Canadian dollar up 0.3 per cent to a 33-year peak of C$0.9579 against the dollar and the Australian dollar rose 0.8 per to $0.9256, its highest level in 23 years, as gold prices struck a 28-year high.
The dollar also eased 0.2 per cent to SFr1.1615 against the Swiss franc, but rose 0.3 per cent to Y114.50 against the yen.
Analysts said the yen came under fresh selling pressure as a strong rally in Asian equities has encouraged investors to re-enter carry trade positions, in which the purchase of riskier, higher-yielding assets is funded by selling the low-yielding Japanese currency.
The yen also fell 0.4 per cent to Y164.95 against the euro, lost 0.6 per cent to Y235.78 against the euro and dropped 0.9 per cent to Y105.72 and 1.1 per cent to Y88.31 against the high-yielding Australian and New Zealand dollars respectively.
However, Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said the prospects for carry trades were uncertain, with the possibility of a pick up in risk aversion driven by disappointing earnings results from European investment banks.