The US dollar plummeted to fresh record lows against the Euro and multi-decade depths against the British Pound, as a sharp drop in bond yields left the greenback with little fundamental support on the day’s price action. The Euro moved to an impressive $1.3720 through late New York trade, while the Pound changed hands at $2.0250 at time of writing. Despite the American currency’s modest gains against its Canadian counterpart, the trade-weighted US dollar index fell to its lowest since January, 2005 at 80.95.

Dollar declines came on a largely empty economic calendar, with the morning’s Wholesale Inventories report failing to elicit noteworthy reactions across USD pairs. A previously anticipated speech by the Fed’s Ben Bernanke likewise did nothing to the greenback’s performance; the Chairman spoke on largely academic subjects and said little about the current outlook on price pressures and monetary policy. Instead, traders moved on a sudden return to risk aversion across worldwide financial markets.

Renewed fears about the US subprime lending sector were enough to spark a sharp rally in US Treasury debt—setting off a chain reaction in the domestic currency and the presumably risky global carry trade. The Standard and Poor’s debt rating agency announced that it would place $12 billion in subprime debt under review for a potential downgrade. Such news arguably comes of little surprise to seasoned fixed income traders; collateralized debt obligations (CDO’s) carried very favorable ratings despite elevated risk of subprime default. Yet the actual announcement was enough to spark a pronounced flight to safety across asset classes. The low-yielding Japanese Yen and Swiss Franc posted their largest single-day gains since early March as speculators liquidated overleveraged carry trade longs.

The sudden flight to safety was also seen in Wall Street trading, with closely-followed equity indices significantly lower through time of writing. The Dow Jones industrial average shed 97 points to 13,552, the S&P 500 lost 15 to 1,517, while the NASDAQ Composite dropped 25 points to 2,645. A day of poor earnings reports likewise added to renewed bearishness, with Sears announcing that profits fell below forecasts on sluggish sales in home appliances. Its shares plummeted over 10 percent to $154.70 despite notice that the company would buy back $1 billion in shares. Given such pronounced declines on presumably bullish news, stocks may be headed on a bumpy ride through the early stages of second quarter earnings season.

Fixed income markets stole headlines, with the US 10-year Treasury Note up an impressive 11/16 points to 95 and 11/16 by 14:19 EST; yields moved 10 basis points lower to 5.04 percent. We can remember few instances of such pronounced fixed income volatility as we have seen in the past several weeks of trade. Suffice to say, the dollar may be in for continued declines if domestic rates of return fall further against major foreign counterparts.

John Kicklighter is a Currency Strategist at FXCM.