The euro has risen sharply against the dollar

At its lowest point at 0100 GMT on Wednesday, one euro bought $1.1978.

The dollar also neared a new three-year low against the yen, with one dollar worth just 107.94 yen.

The dollar's fall against most leading currencies - including the pound - started when data showed a huge slump in foreign money coming into the US.

News that the US Government was planning to introduce more punitive tariffs, this time on a range of textiles and lingerie products manufactured in China, triggered fears about a return to protectionism and the impact that this might have on the recent recovery in the US economy.

Retaliatory action

Traders are fearful that America's actions could spark retaliatory action by China. A week ago the World Trade Organisation ruled against similar import tariffs that the United States had imposed on steel imports from around the world.

There are a number of downward pressures on the dollar

China - already been hit hard by the US steel restrictions - responded immediately by calling off buying a shipment of US soybeans.

It claimed visa difficulties were to blame for the decision, but it could be the start of more retaliatory action by the Chinese.

Currency traders were also shaken by the arrest of 48 Wall Street brokers in connection with an alleged securities and currencies fraud.

The Chinese government expresses deep regret and firmly opposes the US decision... as a WTO member, China reserves the right to lodge lawsuits with relevant organisations Spokesman for the Chinese Commerce Ministry China attacks US textile tariffs

Looming behind all these factors is the growing concern that Washington is going to start to take action to reduce its US trade deficit, even if this means weakening the dollar.

The US economy depends on foreigners financing the country's money needs, but in September foreign investors bought just $5.6bn worth of government debt, down sharply from $25.2bn in August.

Terrorism

Continuing concern about global terrorism is an additional background factor.

Hans Redeker, of BNP Paribas bank, said that "this spate of negative news " had "conspired to keep the dollar under pressure".

White House spokesman Sean McCormack said the US remained committed to free trade, despite the new textile tariffs.

Speaking from London, where President George W Bush is on a state visit, he stressed that US laws allows such quotas if the administration determines that US firms need assistance in staying competitive in the face of "market disruptions".

He added: "Some members of the US textile industry raised concerns about market disruptions caused by surges in Chinese imports and petitioned for temporary relief."

Pressures

In London, the dollar managed to recover slightly against the euro, trading at 1000 GMT at $1.19245, but there are no signs that the pressures against on the US dollar is abating.

The European Commission responded to the euro's rise against the dollar by saying it did not have to react every time there was a movement on the foreign exchange markets.

Its economic affairs spokesman Gerassimos Thomas, said: "We have to wait and see what will be the overall average established over a certain period, and see what the economic impact will be of this exchange rate movement.

"For the moment there is no new position."