Yet major stock markets slumped in Europe - even as U.S. blue chips flirt with a new high - on fears that the roaring European economy could begin to suffer as its exports lose their competitive edge.

Among the European shares hit were exporters like BMW, which could face tougher competition globally as German cars become relatively more expensive.

"The risk is that this will eventually, with the usual delay, lead to a more significant slowdown of European exports and investment growth," said Thomas Mayer, an economist with Deutsche Bank in London. The dollar is falling more sharply against European currencies than others in the world, "which is not a very healthy overall development."

The dollar's broad weakening is expected to continue as the U.S. economy slows, European central banks keep raising interest rates and as policy makers on the European side of the Atlantic keep a public air of unusual calm about the dollar's fall.

The pound rose as high as $2.0133, before receding to $2.0048 in late European trading. The euro traded at one point at $1.3616, just under its record of $1.3670 in December 2004, before settling at $1.3577. The dollar slipped to 1.2055 Swiss francs.

A major force behind the recent gain in European currencies are expectations that central banks will need to continue to increase interest rates to tame booming economic growth. By contrast, economists believe the U.S. Federal Reserve will hold rates steady, or possibly cut rates in the next few months. Higher interest rates attract investors to pounds and euros because they can result in higher returns on assets denominated in those currencies.

Just over two years ago, when the euro was last trading at its record against the dollar, Jean-Claude Trichet, president of the European Central Bank and the main spokesman for the euro, called the euro's climb "brutal" and "unwelcome."

Yet a meeting last week of finance ministers and central bank governors from the Group of Seven industrialized nations signaled no new worries about exchange rates. That gave currency traders reason to speculate that officials are far from stepping in to control markets by intervening with their vast currency reserves as a means to keep the dollar from falling.

On Wednesday, Miguel Angel Fernandez Ordoñez, a member of the ECB's governing council, said in Madrid that the strong euro could indeed "cut growth," but it also helped keep a lid on inflation, wire services reported.

Europe's central bankers are quiet in part because they find the dollar's fall inevitable, given the high debt and low savings rates in the United States.

The bankers feel that the relative value of currencies in part mirrors a rebalancing in global growth that has been in place since the middle of last year.

"Slower growth in the U.S. has been countered by a pickup in growth momentum in the euro area and continued solid expansion in Asia," Ireland's central bank said in a report Wednesday.

The euro-zone economy is growing at the fastest pace in nearly a decade.

The economy is firing on all cylinders, fueled by exports, corporate investment and domestic demand. The unemployment level is also down sharply, helping consumption.

The European construction sector is also strong, figures showed Wednesday. Production grew 0.9 percent in the euro area in February from the previous month, up from 0.3 percent in January, the European Union's statistics office said.

But a strong currency will exacerbate the problems of European companies that rely on the U.S. economy for a bulk of their business.

Signet, a British jeweler with 75 percent of its sales in the United States, also warned Wednesday that the U.S. slowdown was kicking in, prompting the shares in London to slide 3.25 pence to 122 pence.

"Since the start of the financial year, the trading environment in the U.S. appears to have weakened somewhat," Signet's chief executive, Terry Burman, said in a statement.

The Dow Jones Stoxx 50 index fell 16.02 points to 3,852.47, with traders citing concerns about higher interest rates and a weaker dollar.

The German DAX index fell 66.49 points to 7,282.34, with big exporters like BMW and DaimlerChrysler sinking.

While a weak dollar and fears of higher interest rates are hurting European stocks, U.S. shares have been getting a lift from expectations that the Fed will cut interest rates, keeping borrowing costs low for U.S. companies, said Mike Berg, a currency analyst with 4Cast in London.

In afternoon trading Wednesday, the Dow Jones industrial average index was at 12,799.12 points. The record close was high of 12,786.64 on Feb. 20.

"There's nothing out there that is going to stop the dollar's gradual and slow decline," Berg said.

By G. Thomas Sims