March 13 (Bloomberg) -- The dollar fell below 100 yen earlier today for the first time since 1995 and set a record low against the euro after a Carlyle Group fund defaulted on about $16.6 billion of debt, adding to turmoil in financial markets.

The dollar fell to almost one-for-one with the Swiss franc and slumped against the British pound. The drop came as Carlyle said lenders will seize the assets of its mortgage-bond fund, a day after Drake Management LLC said it may shut its largest hedge fund, spurring concern that losses will widen. The tumble in the world's reserve currency drove gold to a record above $1,000 an ounce as investors sought shelter in the metal.

``The weakening, in reality, is a reflection on how the world is measuring the U.S.,'' said Thomas Sowanick, who helps manage $10 billion as chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey. ``Until there is a unified central bank effort to support the dollar, the path of least resistance will be down.''

The dollar fell to 99.77 yen, the lowest since October 1995, before trading at 100.68 at 4:20 p.m. in New York, from 101.79 yesterday. The dollar touched $1.5626 per euro, the weakest since the European currency's debut in 1999, and was at $1.5622, from $1.5551. It slid to a record 1.0045 Swiss francs. Japan's currency advanced to 157.27 per euro, from 158.30.

The U.S. currency fell against a basket of six major trading partners to the lowest since the index began in 1973. The Dollar Index traded on ICE Futures in New York declined as low as 71.795. The dollar dropped to $2.0320 per pound from $2.0270, touching the weakest since December.

`So Many Holes'

The dollar pared its losses as stocks reversed a decline, after Standard & Poor's said the end of subprime-related losses is ``in sight'' for large financial institutions. The S&P 500 index rose 0.5 percent, after earlier losing as much as 2 percent.

``The dollar is trying to find a floor here,'' said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. ``The boat has so many holes that it takes a while to fix it.''

Treasury Secretary Henry Paulson reiterated support today for a ``strong dollar'' that reflects economic fundamentals, after President George W. Bush yesterday said the U.S. currency's drop was not ``good tidings.''

Japan sold yen on the four occasions since 1995 when the currency approached 100 to support exporters including Toyota Motor Corp., the world's second-biggest automaker. The Bank of Japan sold 14.8 trillion yen ($148 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

`Short Trip'

The yen's 24 percent gain against the dollar from a 4 1/2- year low on June 22 will damage earnings, Toyota President Katsuaki Watanabe said today.

The yen may rise as high as 95 per dollar, according to forecasts this month by Citigroup Inc., the third-biggest currency trader, Lehman Brothers Holdings Inc., the fourth- biggest U.S. securities firm, and Mizuho Financial Group Inc., Japan's second-largest publicly traded bank. Deutsche Bank AG and UBS AG, the two biggest currency traders, had predicted the dollar would hold above 100.

The dollar's decline below 100 yen ``may be a very short trip,'' said Michael Woolfolk, a currency strategist in New York at Bank of New York Mellon Corp., in an interview on Bloomberg TV. The Bank of Japan ``will be there; we're not going to see 95'' yen.

Israel and Brazil

The Bank of Israel said it bought foreign currency today for the first time since 1997, causing the shekel to pull back from an 11-year high against the dollar. Brazil's government yesterday imposed a tax on foreigners' purchases of local debt to slow a rally that has driven the real up 62 percent in the past three years.

The Group of Seven, which next meets April 12-13 in Washington, may signal its intent to consider coordinated intervention, UBS strategists wrote in a March 3 report. Unilateral intervention ``seems unlikely'' as Japan's economy has grown every year since 2002, it said.

Central banks intervene in the foreign-exchange market when they buy or sell currencies to influence exchange rates.

The yen also gained as investors exited so-called carry trades, in which they borrow in a country with low interest rates and buy higher-yielding assets elsewhere, earning the spread between the two. The risk is that currency moves erase those profits.

Rate Differentials

Japan's benchmark rate of 0.5 percent compares with 3 percent in the U.S., 4 percent in Europe, 7.25 percent in Australia and 8.25 percent in New Zealand.

Carlyle Capital Corp., co-founded by David Rubenstein, said in a statement it defaulted on about $16.6 billion of debt as of yesterday. Lenders will ``promptly'' take over all of its remaining assets and any remaining debt is expected ``soon'' to go into default, it said.

The yen has rallied 13 percent against the dollar as the Fed cut rates amid the worst housing slump in a quarter of a century and $190 billion of U.S. subprime-mortgage-related losses and markdowns at the world's biggest financial institutions.

The biggest job losses in five years and record fuel costs are eroding U.S. consumer confidence and spending, which accounts for more than two-thirds of the economy. Lehman and JPMorgan Chase & Co. last week said the U.S. is headed into a recession.

U.S. retail sales declined 0.6 percent in February following a 0.4 percent gain the previous month, the Commerce Department said today. The median forecast in a Bloomberg survey was for an increase of 0.2 percent.

`Going Lower'

``Dollar-yen is going lower,'' said Ray Farris, head of foreign-exchange strategy at Credit Suisse in London. ``It will definitely overshoot our 98 forecast in the very near term. Our forecast was for the dollar to reach 98 in three months. The big question now is whether there will be intervention.''

Japanese officials are unlikely to intervene now in the foreign-exchange market because the yen is ``cheap'' compared with other currencies, Eisuke Sakakibara, dubbed ``Mr. Yen'' when he was Japan's top currency official from 1997 to 1999, said in an interview on March 6.

The yen's real effective exchange rate, measured against 15 currencies of major trading partners including China, Europe and Canada, is 99.5, according to Bank of Japan figures. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened on behalf of the Ministry of Finance.

``The yen hasn't played its part in terms of dollar depreciation,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. As carry trades unwind, ``we could find ourselves moving down toward 95 very, very quickly in the next couple of weeks.''

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: March 13, 2008 16:22 EDT