By Vivianne Rodrigues
NEW YORK (Reuters) - The dollar tumbled to a 12-1/2 year low against the Japanese yen on Monday and record lows against the euro and the Swiss franc as liquidity-boosting measures launched by the Federal Reserve over the weekend failed to quell worry about the health of the U.S. financial sector.
The dollar reacted to the Fed taking emergency measures to stem the fast-spreading financial crisis, cutting its discount rate by 25 basis points to 3.25 percent on Sunday and opening up discount window lending to major investment banks, a tool not used since the Great Depression.
Demand for U.S. assets fell even further on the news investment bank Bear Stearns is being bought by rival JP Morgan Chase & Co. for just $2 a share -- versus Friday's closing price above $30 -- in a sign that even heavyweights of the financial sector can be brought down by U.S. subprime mortgage debt and the resulting credit crunch which took hold last summer.
Still, the dollar slid as much as 3 percent to below 96 yen, its lowest since 1995 and bringing year-to-date losses to more than 13 percent.
"The market remains very jittery and very dollar averse at the moment," said Matthew Strauss, a currency strategist at RBC Capital in Toronto. "The U.S. financial sector is the main source of concern."
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 will take action to prevent the currency from appreciating.
The dollar fell as low as 95.77 yen according to Reuters data
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 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.
"Until we see signs of an improvement on one of these two fronts, ideally both, then the dollar will remain under more pressure," he added.
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. It later pared those gains to $1.5774.
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.
This time though they have so far kept to words, with Japanese Finance Minister Fukushiro Nukaga saying on Monday he is watching currency market moves in cooperation with authorities in the United States and Europe.
"Our feeling is that the timing is not ripe for this (intervention) to happen -- therefore it remains a low probability event," Danske's Knuthsen said.
"Although currency movements may seem excessive they are not the cause of volatility in stock and credit markets: rather the movements are the results of turmoil in other asset markets."
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.
Concerns about the U.S. financial system prompted some investors to shift their funds to what they considered as safe-haven commodities, boosting spot gold to a record peak above $1,030 per ounce
(Additional reporting by Veronica Brown in London; Editing by Richard Satran)