The Fed will likely cut rates by 75 basis points on March 18, said Tomoko Fujii, head of economic strategy at Bank of America, who raised her forecast from half a percentage point last week.
Some speculators are betting the rate cut will be as much as one percentage point, she said.
'There are a lot of negative factors against the dollar in the pipeline, including a deeper rate cut,' Fujii said. 'That's why it is difficult to stop the dollar's decline.'
At 12.00 pm (0400 GMT), the euro was trading at 1.5848 dollars, after soaring earlier today to as high as 1.5905, its strongest level since the common currency began trading in January 1999.
The dollar was quoted at 96.75 yen, after dropping to as low as 95.75 earlier today, a level not seen since August 1995, according to traders.
The US currency continued its descent versus major currencies after the Fed earlier surprised the market with a 25 basis points cut in its discount rate, the rate at which it lends directly to banks.
Financial markets have roiled recently from the collapse of Wall Street heavyweight Bear Stearns, which has prompted the Fed to step in.
JPMorgan Chase said Sunday it will acquire rival Bear Stearns in an all-share deal valued at 236.2 million dollars, roughly 1 percent of what the investment bank was worth just 16 days ago.
The Fed will provide special financing to JPMorgan for the deal, as the central bank has agreed to fund up to 30 billion dollars of Bear Stearns' less liquid assets.
'The foregoing announcements from the Fed suggest that the committee might be preparing for a larger than normal move in the target fed funds rate on Tuesday or is subtly assessing the reaction in financial markets ahead of the Tuesday meeting or both,' said Thomas Lam, senior treasury economist at United Overseas Bank.
The Fed has slashed its benchmark rates by a cumulative 225 basis points since September to ease the credit crunch stemming from unpaid housing mortgages.
'Investors seem to have taken these moves as evidence of the deepening of the credit crisis, as they do well remember that the previous emergency rate cut by the Fed in late 2007 failed to quell the credit crunch,' NTT Smarttrade director Takashi Kudo said.
'Investors also seem to think that the Fed's action was a little too late and reactive,' he said.
Adding to the gloom, London's Telegraph reported that Goldman Sachs will this week announce asset writedowns worth about 3 billion dollars, its biggest to date.
The bank's 3 billion dollar writedown will be based partly on the declining value of its 4.9 percent stake in Industrial & Commercial Bank of China (ICBC), which is held separately on Goldman's balance sheet, according to the UK newspaper.
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