updated 9/12/2007 7:24:11 PM ET 2007-09-12T23:24:11

The dollar plunged to its lowest point ever against the euro Wednesday amid speculation that the Federal Reserve will soon cut interest rates and on a warning from the U.S. treasury secretary that turbulence in financial markets may linger.

The 13-nation euro rose as high as $1.3914 in New York trading — topping its previous record of $1.3852 reached July 24. It later fell back to $1.3908, still up from $1.3832 in New York late Tuesday.

The euro surged after Treasury Secretary Henry Paulson, speaking to officials from some of the biggest financial firms in the U.S., said volatility in financial markets will take some time to be resolved, particularly in the area of subprime mortgages.

"We have been experiencing market turbulence and as I have said for awhile, it is going to take some time to work its way out," Paulson said at a meeting at the Treasury Department. "We are going to work our way through this, in some markets more quickly than others."

The euro's strength threatens to make European exports more expensive, and therefore less competitive — although the currency's movements this year have been gradual rather than abrupt.

The weakening dollar conversely makes U.S. exports more competitive, which is good news for American manufacturers but means rising prices for imports to the U.S. The dollar's decline also diminishes the spending power of American tourists in Europe, while attracting to the U.S. visitors from Europe seeking cheaper accommodations and shopping.

The dollar, which has hovered within a few cents of its record low over recent weeks amid the market turmoil caused by the subprime mortgage crisis, had come under new pressure since the U.S. Labor Department issued unexpectedly poor August jobs data Friday.

That report strengthened speculation that the Fed will cut interest rates at its Sept. 18 meeting by as much as half a percentage point. A cut from the current rate, 5.25 percent, would be the first reduction in four years.

Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.

"There will be a point when foreign investors won't be as willing to put money to work in the U.S.," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.

Fed Chairman Ben Bernanke offered no hints about the potential for a rate cut during a speech in Germany on Tuesday.

"The fact no mention of monetary policy was made in  yesterday's speech in Berlin has done little to placate the market, and we're also seeing growing speculation that the Fed may elect to cut rates by a half a point as they try to steer the economy away from recession," said James Hughes, a market analyst at CMC Markets.

The European Central Bank last week put its own two-year run of gradual interest rate rises on hold but left many economists still expecting a quarter-point increase from the current 4 percent before the end of the year.

The dollar was lower Wednesday against the British pound, drifting down to $2.0302 from $2.0317 in New York late Tuesday.

The U.S. currency was lower against the Japanese yen, even as Prime Minister Shinzo Abe announced that he would resign, putting an end to his troubled year-old government. The dollar dipped to 114.26 yen from 114.30 yen.

In other trading, the dollar bought 1.0362 Canadian dollars, down from 1.0424 late Tuesday, and 1.1848 Swiss francs, falling from 1.1893.

At Berlin's Brandenburg Gate, American newlyweds Doracy and Russell Harrison said the unfavorable exchange rate had prompted changes in their plans.

"Accommodation is where you really feel it," said Doracy Harrison, 27, of Raleigh, N.C., a program manager at an aquatic center.

"We probably wouldn't have come if were weren't staying with friends. We haven't been as gung-ho about eating out and have planned on low-key cafes instead of nicer places we'd usually eat."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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