NEW YORK (MarketWatch) -- The dollar tumbled Tuesday against other major currencies, particularly the euro and the Japanese yen, after the Federal Reserve slashed U.S. interest rates to a record-low range of zero to 0.25%.

The dollar index DXY, +0.24% , a measure of the U.S. dollar against a trade-weighted basket of six currencies, fell to 79.921, compared with 81.630 before the announcement.

"It is no surprise to see the U.S. dollar selling off aggressively as it is now the lowest-yielding [Group of 10] currency," said Kathy Lien, director of currency research at GFT, in a note to clients. "This was the right move for a central bank that wants to be proactive and no longer just reactive."

The central bank pulled out all the stops in its campaign to save the U.S. economy, promising to try an array of new economic measures to stimulate spending in addition to slashing interest rates.

The Federal Open Markets Committee established at target rate for the federal funds rate of 0 to 0.25%, effectively reducing its key rate for overnight lending to banks by between 0.75% and 1%. See The Fed.

Most Wall Street firms expected the U.S. central bank to cut its benchmark rate in half, although many economists had seen scope for a reduction all the way to 0.25%.

The euro was buying $1.4097, compared with $1.3792 before the announcement.

The British pound surged to $1.5590, from $1.5335.

The dollar fell to 88.92 Japanese yen, compared to 90.09 yen before the central bank's decision was released.

The Fed's move "intensifies the yield assault to the dollar, prompting the biggest two-day rally in the euro vs. the dollar on record [a 4.82% gain], following last week's 5.24% jump, leaving little chance for traders but to extend speculative and directional selling in the U.S. dollar," wrote Ashraf Laidi, chief market strategist at CMC Markets.

Housing starts plunge

In economic news, housing starts plunged 18.9% to a seasonally adjusted annual rate of 625,000, the lowest since the Commerce Department began keeping records in 1959. See Economic Report.

Separately, U.S. consumer prices fell in November at the fastest rate since 1932, the Labor Department reported Tuesday.

The U.S. consumer price index fell by a seasonally adjusted 1.7%, the Labor Department reported Tuesday, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947.

On a non-seasonally-adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression. Read more.

Earlier Tuesday, the euro had come under pressure after the Markit preliminary purchasing managers indexes for the euro zone's manufacturing and services sectors fell to record lows, signaling a deepening of the recession in the 15-nation region. See full story.