The dollar fell to the lowest level since 1995 against the yen on speculation the Federal Reserve will debase the currency by stepping up purchases of government debt to support the economic recovery.

The euro erased its gain after surpassing $1.40 for the first time since February as European Central Bank President Jean-Claude Trichet said exchange rates should reflect economic fundamentals. Sterling touched a level above $1.60 as the Bank of England refrained from increasing its bond-buying program.

“The weak-dollar theme has not begun to change,” said Boris Schlossberg, director of research at the online foreign- exchange trader GFT Forex in New York. “Any retracement by the euro will be shallow. The natural impulse in the market is to buy on dips.”

The dollar fell 0.7 percent to 82.36 yen at 3:05 p.m. in New York, from 82.93 yesterday. It touched 82.11, the lowest level since May 1995. The euro traded at $1.3919, compared with $1.3930, after touching $1.4029, the highest since Jan. 28. The euro slid 0.7 percent to 114.67 yen, from 115.53. The pound decreased 0.1 percent to $1.58772 after touching $1.6018, the highest level since Feb. 3.

The euro fell earlier today after breaking $1.40, where orders to sell the currency may have been clustered, according to analysts. The seven-day relative strength index of the euro touched 81.22, remaining above 70 for a 14th consecutive day in the longest stretch since March 2008. Readings above that number indicate a currency may be poised to drop.

‘Overbought Territory’

“It is a cliff that the euro climbed very quickly,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The technical momentum indicators are pointing to overbought territory for the euro.”

Australia’s dollar surged to a record versus its U.S. counterpart and neared parity as employers added the most jobs in eight months. The loonie fell from almost a five-month high before U.S. and Canadian employment reports tomorrow.

The Dollar Index, used by IntercontinentalExchange Inc. to track the greenback against the currencies of six major U.S. trading partners including the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, gained 0.3 percent to 77.63 after touching 76.91, the lowest level since Jan. 15.

The gauge of the greenback has dropped 4 percent since Aug. 10, when the Fed said after its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as “more modest” than earlier anticipated.

Fed Asset Buying

The central bank completed in March a program in which it created new money to purchase $1.25 trillion of agency mortgage- backed securities and about $175 billion of agency debt, debasing the dollar. The Fed was the biggest buyer of Treasuries when it purchased $300 billion of U.S. debt in 2009.

Fed Chairman Ben S. Bernanke said on Oct. 4 that the central bank’s first round of large-scale asset purchases aided the economy and that further buying is likely to help more.

The U.S. dollar was headed for a third weekly drop against the yen and a fourth weekly decline against the euro before tomorrow’s meeting of Group of Seven industrialized nations.

Japan won’t weaken the yen to become more competitive with other countries in trade, and any currency intervention would be aimed at restraining excessive moves, according to Vice Finance Minister Fumihiko Igarashi.

“It’s not our intention to engage in a currency- devaluation race for the sake of the national interest,” Igarashi said in an interview in Tokyo today. “We could conduct smoothing operations when movements are extremely volatile, that would be permissible.”

Trichet on Dollar

Trichet said at a press conference in Frankfurt that he supports a “strong dollar” and opposes “disorderly” shifts in global exchange rates.

Canadian Finance Minister Jim Flaherty, who chairs the G-7 gathering, said yesterday that “there are concerns about interventions in currency markets” and that he’s “sure” the issue will be discussed. Brazil’s Finance Minister Guido Mantega warned on Sept. 27 of a “currency war” and said that his government will buy all “excess dollars” in the market to curb the real’s appreciation.

The dollar remained lower against the yen even after the Labor Department reported that initial jobless claims unexpectedly dropped to 445,000 in the week ended Oct. 2, from a revised 456,000. The median forecast of 47 economists in a Bloomberg News survey was for an increase to 455,000 from a previously reported 453,000.

U.S. Payrolls

Private nonfarm payrolls climbed by 75,000 in September after an increase of 67,000 in the previous month, according to the median forecast of 59 economists in a Bloomberg News survey before tomorrow’s report from the Labor Department. The jobless rate is expected to increase to 9.7 percent from 9.6 percent.

“Initial jobless claims didn’t really give any direction to the market,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “We will have to wait and see until nonfarm payrolls tomorrow.”

Australia’s currency climbed 0.2 percent to 97.97 U.S. cents, from 97.75 yesterday, after touching 99.18, the most since exchange controls were ended in 1983. The South Pacific nation’s employers added 49,500 workers and the unemployment rate held at 5.1 percent in September, the government reported.

The loonie, as the Canadian currency is known, declined 0.7 percent to C$1.0185 per U.S. dollar after reaching C$1.0063 yesterday, the strongest level since April 30.