The dollar was off earlier lows as its rapid plummet following the news that US bank Bear Stearns is to be sold at a knock-down price led to some profit taking, but analysts said the currency is set for further falls as fears for the US financial sector escalate.

JP Morgan announced yesterday that it was to buy Bear Stearns (nyse: BSC - news - people ) for just 2 usd a share - it closed on Friday at 30 usd a share - in a move backed by the Federal Reserve. Bear Stearns was forced to seek emergency funding from the Fed on Friday as it could no longer obtain the money it needed to operate from the credit markets.

The news has fuelled fears that the credit crunch is set to get even worse as institutions become increasingly nervous to lend to one another.

The Fed tried to support the sector yesterday by cutting its discount rate - the rate at which it lends to financial institutions - by a quarter point to 3.25 pct and eased the requirements needed to obtain access funding.

Analysts said the move underlines the extent of the concern the US central bank has for financial system.

'Although these measures are absolutely necessary it underlines the emergency under which the Fed is now acting,' said Hans Redeker, currency strategist at BNP Paribas (other-otc: BNPQY.PK - news - people ).

'Should another investment bank run into trouble the situation would become more difficult since other US banks are not in a position to help,' he added.

The news powered the euro to a record high of 1.5903 usd which the greenback fell against the yen to a 12-year low of 95.72 yen.

Now markets are looking for the Fed to provide further support by cutting its key Fed Funds rate by 100 basis points to 2.00 pct tomorrow. Last week markets were expecting rates to be cut by 50 or 75 points but the latest news has sent these expectations sharply higher.

Mitul Kotecha, head of currency strategy at Calyon, said a 100 basis point cut is still unlikely to do much to shore up confidence.

'Either way the Fed faces a lose-lose situation as a less than 100 basis point rate cut will result in market disappointment and an intensification of growth concerns resulting in a dollar and equity market sell-off whilst a 100 point cut could see a limited market reaction as it will be seen as the Fed trying to stay on top of the curve,' he said.

The news bolstered support for the yen and swiss franc, generally seen as safe haven currencies, while high-yielding currencies such as the Australian dollar and pound have come under pressure.

The huge movements in some currencies' values in recent days, most notably the yen which has appreciated by around 5 pct in two days, has led to increasing speculation that central banks could intervene to try and adjust the exchange rate.

However analysts at Barclays (nyse: BCS - news - people ) Capital, said while intervention from central banks to strengthen the dollar is a possibility it is unlikely to happen in the near-term due to the limited chance of success such a move would have.

'Central banks are wary about forex intervention because there is a good chance it will not work, thus causing credibility issues at a time when this is becoming an increasing concern,' they said.

Meanwhile the pound was just off a fresh all-time low against the euro, which hit 0.7912 stg overnight. Sterling's relatively high-yield compared to other currencies mean it comes under pressure at times of heightened risk aversion as investors place a greater chance on its value falling as the economic outlook deteriorates.

'The pound is failing to gain any ground, - the consensus view here says this is due to the fact that the Bank of England will be obliged to cut rates in the coming months to stimulate demand,' said James Hughes, analyst at CMC Markets.

The only major economic data due out this morning is euro zone employment figures, but speeches from European Central Bank rate setters Axel Weber and Christian Noyer are likely to garner more attention as markets look for any sign the bank might intervene in the currency markets.

In the US some attention may be played later to the Empire State Manufacturing survey and US current account balance, but focus is likely to remain on the credit and equity markets, and the run-up to tomorrow's interest rate decision.

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