Dollar tumbles to record low against euro

NEW YORK (CNNMoney.com) -- The dollar fell to a record low against the euro Tuesday as bearish sentiment on the greenback persisted, with investors still focused on narrowing interest rate differentials between the United States and Europe.

The euro bought $1.372 up from $1.362 Monday. The dollar declined against the yen as well, buying ¥122.14 from ¥123.36 in the previous session.

"The dollar is weaker today which is essentially a reflection of the ongoing theme that interest rates are being hiked around the world but are on hold in the U.S., which is undermining dollar sentiment," David Powell, senior currency strategist at IDEAglobal in New York, told Reuters.

Treasurys rallied Tuesday as worries about subprime mortgage debt and the deteriorating housing market hurt stocks and drove investors into safer U.S. government bonds.

Standard & Poor's said it might cut $12 billion of subprime-related debt on expectations for more delinquent and defaulted U.S. home loans. This sparked a selloff in nongovernment bonds, stocks and the U.S. dollar and triggered the move into Treasuries.

"Clearly, the Treasury market is worried about possible spillover from subprime debt and elsewhere and this has caused risk premia to increase moderately in a number of asset classes," LaVorgna said. "It's happening in a relatively orderly fashion but the risk is that things could be less orderly and that the Fed might have to address that."

Less highly rated nongovernment bonds are riskier than Treasurys and spreads refer to the extra yield or risk premium that investors demand for holding these riskier securities.

In afternoon trade, the benchmark 10-year Treasury note's price was up 20/32, or $6.25 for every $1,000 invested, for a yield of 5.06 percent, compared with 5.14 percent late on Monday. Bond yields and prices move inversely. The benchmark Treasury note is already on track for its strongest weekly performance since March.

The 10-year interest rate swap spread - a gauge of investors risk aversion - widened to 66 basis points, its widest level since August 2003, strategists said.

"Today's [interest rate swap spread] widening is on credit concerns, the fear that we get further spread widening across credit products and fear of a liquidity crisis on the back of hedge fund failures and pain in the leveraged community," said Fidelio Tata, interest rate derivatives strategist with RBS Greenwich Capital in Greenwich, Connecticut.

Adding to concerns about the residential real estate, U.S. home improvement retailer Home Depot (up $0.09 to $40.32, Charts, Fortune 500) lowered its 2007 earnings outlook because of the deteriorating housing market and the country's largest homebuilder, D.R. Horton (down $0.47 to $19.32, Charts, Fortune 500) Inc. forecast its first quarterly loss as a public company.

The Dow Jones industrial average was down 0.3 percent to 13,605.91, with investment banks and mortgage lenders among the biggest losers.

A speech by Federal Reserve Chairman Ben Bernanke raised no red flags on inflation.

"The market sensed that Bernanke is keeping the powder dry ahead of his Humphrey-Hawkins Congressional testimony [next week] and really, since the Fed has been a lot more descriptive in its FOMC statements, Bernanke doesn't feel he has to come out and address the near-term economic outlook," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

The two-year note, which responds closely to expectations for central bank interest rate moves, traded up 32/32, or $10 for every $1,000 invested, for a yield of 4.89 percent, compared with 4.95 percent late on Monday.

The 30-year bond traded up 1-7/32 in price, or $12.18 for every $1,000 invested, for a yield of 5.14 percent.

-- from staff and wire reports