Strauss said that despite the high levels in dollar-yen and rumors of possible intervention by the Bank of Japan, there were no clear indications the Japanese government is ready to take action to prevent the currency from appreciating further.

The dollar fell as low as 95.77 yen according to Reuters data , and set a historic trough at 0.9637 Swiss francs after breaking below parity last week.

Implied volatility -- a key component of option prices -- in dollar/yen surged to its highest levels in around a decade both on the one-week and one-month C horizon.

"The dollar is suffering from the dual shock of an economic slowdown and a financial crisis," said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.

In another report on Monday, the U.S. Treasury Department said net overall capital flows in the country fell to its lowest level in four months in January.

The inflows were not sufficient to cover the month's U.S. trade deficit.

"Today's TICs report takes a back seat to tomorrow's FOMC's decision, with market expectations regarding the size of the anticipated cut all over the map," Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon, said in a note.

Short-term U.S. Treasury yields fell to five-year lows as investors expect the Fed could slash overnight rates by up to 100 basis points by the end of its policy meeting on Tuesday.

The euro rose as high as $1.5904, having already added around 4 percent in the first two weeks of March, roughly doubling its year-to-date gains.

Intervention?

The rapid dollar fall fanned talk of possible coordinated dollar-buying intervention from major central banks other than the Bank of Japan.

"From the ECB point of view, these are moves which are not easy to ignore," Dresdner Kleinwort currency strategist Michael Klawitter said.

Central banks in Europe, Japan and the U.S. last jointly intervened in September 2000, propping up the euro after the currency hit an all-time low below $0.85, a loss of nearly 30 percent of its value since its January 1999 launch.

ECB Governing Council Member Klaus Liebscher said in Vienna sharp movements in the currency markets were a matter of concern for the central bank.

"I am concerned about the development... and about the excess volatility, which we see now in the markets," he said.

Japanese Finance Minister Fukushiro Nukaga also said on Monday he is watching currency market moves in cooperation with authorities in the United States and Europe.