By Ye Xie and Gavin Finch / Bloomberg

The dollar fell to a record below $1.55 per euro on concern that the Federal Reserve's plan to provide funds to banks won't be enough to break the gridlock in money-market lending and stem credit losses.

The U.S. currency erased more than half of yesterday's 1.6 percent rally versus the yen, the biggest in six months, which came after the Fed said it would extend $200 billion of credit to financial institutions to spur lending. Traders bet the Fed will cut rates by as much as three quarters of a percentage point next week to avert a recession, while the European Central Bank keeps borrowing costs unchanged.

``It's difficult for the dollar to gain traction,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets at Putnam Investments in Boston. ``The Fed is probably running out of options; the market is fixated on interest-rate differentials, which are clearly negative for the dollar.''

The dollar fell to $1.5504 per euro, the weakest since the euro's 1999 debut, and traded at $1.5492 at 10:12 a.m. in New York, from $1.5338 yesterday. The previous historic low was set yesterday. It dropped to 102.32 yen from 103.42, within one yen of an eight-year low. The euro traded at 158.59 yen from 158.61.

Euro gains were limited after Luxembourg Finance Minister Jean-Claude Juncker said he is ``very vigilant'' on the euro in current circumstances and that exchange rates should reflect fundamentals. He spoke to reporters in Brussels.

Gulf Pegs

The yen climbed against major currencies, including a 1.3 percent rally versus South Africa's rand, as a government report showed Japan's economy grew an annualized 3.5 percent last quarter, faster than the 2.3 percent median forecast of economists surveyed by Bloomberg News.

Forward contracts to buy United Arab Emirates dirhams rose the most in two weeks after Economy Minister Sultan Bin Saeed Al Mansouri said the dirham's dollar peg is ``contributing'' to record inflation.

A Qatari official denied in a telephone interview that Gulf central bankers will consider dropping the dollar peg when they meet next week. Gulf countries are under pressure to revalue their currencies or drop dollar pegs after the U.S. currency fell 10 percent against the euro last year and the Fed cut rates. The weaker dollar boosts the cost of imports from Europe, while Gulf states have to follow rate cuts, stoking inflation.

The euro extended its gains against the dollar earlier after a European Union report showed industrial production in the region increased for the first time in three months in January. It rose 0.9 percent from the prior month, more than twice the rate forecast by economists surveyed by Bloomberg.

`Stay Short Dollars'

The euro also rose on speculation ECB President Jean-Claude Trichet will highlight inflation risks today at a press conference. ECB council member Axel Weber yesterday said that he sees ``no room'' to lower rates.

The ECB's main rate is 1 percentage point above the Fed's 3 percent target rate for overnight loans between banks.

Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed yesterday on a second round of emergency- loans to curb rising money-market rates. The Fed said it will lend Treasuries through a new lending tool and widen the collateral it accepts to include mortgage-backed securities.

``Read the need for such new measures as being a symptom of what ails the world and not a panacea for its problems,'' said David Simmonds, the London-based global head of currency research at Royal Bank of Scotland Plc, the world's fourth- biggest foreign-exchange trader. ``Stay short dollars.''

Bloomberg Currency Survey

The euro interbank offered rate, or Euribor, for three month euro loans rose for a seventh day, climbing 1 basis point to 4.61 percent, the highest since Jan. 7, the European Banking Federation said today.

The collapse of the U.S. subprime mortgage market has caused losses and writedowns of $190 billion at the world's biggest financial institutions. Concerted action announced Dec. 12 temporarily eased the shortage of cash in money markets at the end of last year.

The dollar will extend its decline against most major currencies in the next six months as the U.S. economic slowdown deepens, a survey of 5,430 Bloomberg users showed.

The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, declined to 72.54. It set a record low of 72.462 on March 7.

The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

Traders bet the Fed will cut its target rate as much as 0.75 percentage point on March 18 to keep the U.S. from falling into a recession. The likelihood of a reduction to 2.25 percent was 68 percent, according to futures on the Chicago Board of Trade. The balance of bets is on a cut to 2.5 percent.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.netGavin Finch in London at gfinch@bloomberg.net