NEW YORK, July 21: The European single currency soared to a new record high against the dollar on Friday as the US currency continued to be undermined by housing market worries.

The euro at 2100 GMT fetched $1.3820 from 1.3802 in New York late on Thursday, after trading as high as $1.3843.

The pound rallied to a fresh 26-year high to $2.0546 after 2.0486 Thursday.

The dollar also hit a six-week low against the yen of 120.85. It later stood at 121.26 yen, down from 121.99 yen on Thursday.

With no economic data released today, the only thing that could rattle the currency markets was a reversal in US stocks said Kathy Lien at Forex Capital Markets.

Not only did a reversal actually occur, but bond yields also fell sharply, triggering major losses in the both the US dollar and carry trades, a reference to borrowing at low rates in one currency to invest elsewhere for higher yields.

Worries about problems in the US subprime mortgage sector -- loans to homeowners with patchy credit histories -- caused sharp falls on global equity markets on Friday as investors reduced their exposure to risk.

Investors are concerned that the housing market problems could spread to the rest of the US economy after Federal Reserve chairman Ben Bernanke warned this week of an impact on growth.

BNP Paribas currency analyst Ian Stannard said sharp losses in the dollar against the yen were because of an unravelling of the carry trade caused by risk aversion among traders.

The carry trade is a risky but popular practice of borrowing money in countries with low interest rates such as Japan and investing in countries with high interest rates such as Australia or Britain.

Stannard also noted that the yen had been “catching up” with gains in other Asian currencies after an announcement by the People's Bank of China of a 27 basis point rise in interest rates.

The yen may be catching up a bit. But overall the dominant factor driving currency markets is a dollar weakness story, he said.

In addition to worries about the housing market and the outlook for the US economy, the dollar has also been hampered by prospects of higher interest rates in Europe and elsewhere.

While the European Central Bank appears set to lift eurozone borrowing costs in September from the current level of 4.00 per cent, the US Federal Reserve has frozen American rates at 5.25 per cent for 13 months.

In late New York trade, the dollar stood at 1.2007 Swiss francs from 1.2031 Thursday.

— AFP