Feb. 28 (Bloomberg) -- The dollar fell to a record low against the euro, extending its three-day rout to 2.5 percent, as a cooling labor market and slowing economy fueled bets the Federal Reserve will cut interest rates at least twice more.

The U.S. currency also approached a 2 1/2-year low versus the yen and dropped to a record against the Swiss franc, deepening its losses after Fed Chairman Ben S. Bernanke said it was ``fair'' to say it was tougher for the bank to respond now than to the recession of 2001.

``There is very real concern that there is a possibility of a dollar crisis,'' said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London, in an interview with Bloomberg Radio. ``I don't use the word crisis lightly; we are in uncharted territory for the dollar, especially against the euro.''

The U.S. currency touched $1.5229 per euro, the weakest since the euro began trading at about $1.17 in January 1999. The dollar was at $1.5213 at 4 p.m. in New York, from $1.5120 yesterday. The dollar fell to 105.34 yen from 106.49, touching the lowest since Jan. 23, when it reached a 2 1/2-year low of 104.97 yen. The dollar fell as low as 1.0485 francs.

The slide may stop at $1.55 per euro, though there's a growing risk of a ``dollar crisis'' that drives it lower, Chertkow said.

The yen rose against its major counterparts as falling stocks led investors to cut holdings of higher-yielding assets funded with carry trades in Japan.

Steepest Since 2004

The currency's three-day slide is its steepest since January 2004. It extended its slump today as the government said initial jobless claims rose 19,000 to 373,000 in the week to Feb. 23. The U.S. grew at an annual rate of 0.6 percent last quarter, from 4.9 percent the prior three months, the government also said. The median forecast in a Bloomberg survey was for growth of 0.8 percent last quarter.

The U.S. currency has dropped 13 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since September. The U.S. Dollar Index, which tracks the currency against six major counterparts, touched 73.63, the lowest since its start in 1973. The index is traded on ICE Futures in New York.

South Africa's rand was the worst performer among the 16 major currencies, falling 1.7 percent against the dollar today as mounting concern that the U.S. will fall into a recession led traders to pare bets on currencies tied to global growth and demand for commodities.

The yen advanced 2.7 percent to 13.94 per rand and gained 1 percent versus the New Zealand dollar as investors reduced carry trades, where they get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between them.

`Strong Dollar'

Japan's benchmark rate of 0.5 percent, the industrialized world's lowest, compares with 11 percent in South Africa, 8.25 percent in New Zealand and 7 percent in Australia.

The Standard & Poor's 500 Index fell 0.9 percent.

President George W. Bush said his administration supports a ``strong dollar,'' and the currency's value will be reflected by markets as the economy grows. He spoke at a news conference at the White House.

The so-called synthetic euro, which estimates the European currency's value before 1999, reached the strongest since at least January 1989, when Bloomberg's data on the measure begin.

The euro is 30 percent above its debut level, and up 84 percent from a record low of 82.30 U.S. cents in October 2000.

Broken Range

After trading in a range since November of about $1.43 to $1.49 per euro, the dollar's decline gained momentum this week after Fed Vice Chairman Donald Kohn said on Feb. 26 that turmoil in credit markets and the possibility of a slower economy pose a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

The dollar then weakened past $1.51 per euro yesterday after Bernanke said the bank ``will act in a timely manner'' to insure against ``downside risks'' to the economy. His remarks came in testimony to the House Financial Services Committee.

Bernanke said before a Senate panel today that accelerating inflation at a time of slowing growth is ``complicating'' the Fed's job.

``He said the Fed is in a more difficult situation than 2001,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``He sent a signal that the Fed may be pushing on a string, and they will have to cut rates more aggressively.''

`Powerful Move'

CME Group Inc., the largest exchange for currency futures, said electronic currency options trading rose to the second- highest ever yesterday. A total of 35,308 contracts with a notional value of $5.06 billion changed hands, CME said in a statement. The record of $5.24 billion was set on Jan. 22, when the Fed cut rates by 0.75 percentage point in an emergency move.

Futures on the Chicago Board of Trade show a majority of traders expect the Fed to cut rates to at least 2 percent by mid-year, from 3 percent now. The bank has slashed its benchmark from 5.25 percent in September, and is scheduled to meet next on March 18, and then on April 30.

``This powerful move in favor of the euro has drawn a lot of people into this trade, particularly momentum model type buyers,'' said David Mozina, a senior currency strategist at Lehman Brothers Holdings Inc. in New York. ``The interest-rate support for the dollar is melting across-the-board.''

European Central Bank President Jean-Claude Trichet today said ``price stability is a necessary condition'' for ongoing economic expansion and employment. The ECB next meets on March 6 to decide on the main rate, which is at 4 percent.

``The ECB is taking a more hawkish stance than the Fed, which is undermining the dollar,'' said Larry Kantor, co-head of research at Barclays Capital Inc. in New York.

At 1.84 percent, the two-year U.S. Treasury note yielded 1.38 percentage points less than similar-maturity German government bunds, close to the widest difference since 2002.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net

Last Updated: February 28, 2008 16:03 EST