NEW YORK (CNN/Money) - The dollar tumbled Tuesday as traders fretted over growing signs of U.S. protectionism and a waning appetite for U.S. assets among foreign investors.

In afternoon trading, the euro bought $1.1955, its highest level ever against the U.S. currency. In early-morning trading, the euro was at $1.174. The dollar was fetching 108.05 yen, nearly a full yen weaker than its early-morning level of 109.08.

Traders cited two factors behind the dollar's fall.

First, Commerce Undersecretary Grant Aldonas told reporters that the Bush administration has decided to set new quotas on textile imports from China.

Such temporary quotas are allowed under the terms of China's entry into the World Trade Organization, but the timing of the measure seemed odd, given that the World Trade Organization just ruled that the United States' steel tariffs are illegal and given that Treasury Secretary John Snow said yesterday that the United States wasn't headed into a "protectionist mode."

The move makes U.S. trade policy appear protectionist, according to Miller Tabak bond strategist Tony Crescenzi, and that makes currency traders very nervous. HSBC's currency team noted that the steel tariffs the United States imposed in March 2002 came just before the greenback began a major downtrend.

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The imposition of the Chinese textile quotas also suggests that the administration will continue to pressure China to revalue its currency, the yuan. That would hurt the dollar.

Meanwhile, the Treasury Department released figures showing that foreign investment in U.S. stocks and Treasurys slowed sharply in September -- which pressures the dollar since there's less apparent demand for U.S. assets.

Breaking down the numbers, foreign investors sold $6.3 billion worth of U.S. equities compared with $11.5 billion worth of equity purchases in August. They bought just $5.6 billion worth of Treasurys -- down sharply from the $25.1 billion they bought the month before.

The drop off in Treasury buying was especially notable since the Japanese government reported that it bought $40 billion of the U.S. currency in September in its efforts to stem the yen's strength. Much of that money would have gone into Treasurys. The suggestion is that some other country or countries were big sellers.

Both the China decision and the Treasury Department numbers revived long-standing worries that the current account deficit -- the gap in the United States' trade in goods and services with the rest of the world -- at more than 5 percent of gross domestic product is unsustainably large.

As a result of that deficit, foreign money must constantly flow into dollar-denominated assets just to keep the greenback stable. Eventually, say the dollar bears, foreign investors are going to decide enough is enough and the dollar will be in for a sharp adjustment.

"The current account argument has come back into the picture and today's data feeds into it," said HSBC currency strategist Meg Browne.

U.S. manufacturers have been pushing for a weaker dollar on the view that it makes them more competitive abroad and less vulnerable to foreign competition at home. Despite the lip service it's given to a continued "strong dollar policy", the White House, too, appears to favor some weakening in the greenback.

The worry, however, is that historically when other countries running large current account deficits have seen their currencies adjust, that adjustment has been far sharper than people expected, with a tendency to overshoot.