WASHINGTON  How low can the dollar go?

Battered by bad news and mounting fears over the American economy, the dollar plumbed new depths on Thursday, helping drive oil prices to record levels. The greenback traded at a new low of $1.56 against the euro, while oil prices settled at $110 a barrel. Early in the day, the dollar sank below 100 Japanese yen for the first time since 1995, but it ended the day slightly above that milestone.

The dollar has been declining in value against the euro and several other currencies since 2002, slamming travelers to Europe and American consumers purchasing European goods. Politicians are deploring the weak dollar as a sign of American economic decline and influence.

To make matters worse, many economists say that the problems of a sagging dollar are feeding off each other. As the dollar weakens, holders of dollars, especially those overseas, are aiming for better returns on their assets by diversifying their portfolios toward other currencies, sending the dollar into further decline.

“If we look forward, we are going to see the U.S. economy weakening more and interest rates cut more,” said Desmond Lachman, a resident fellow at the conservative American Enterprise Institute. “The immediate prospects for the dollar don’t look encouraging.”