The dollar tumbled against the world's leading currencies ­yesterday as investors bet that evidence of a faltering US ­recovery would lead to further monetary easing by the Federal Reserve.

Currency traders said the worsening outlook for the US economy raised the prospect of a return of the so-called dollar "carry trade", in which investors take advantage of low US interest rates to invest in ­higher-yielding currencies.

The yen yesterday approached its highest in 15 years against the dollar, trading at Y85.66, while the euro rose to $1.3261, a three-month high.

"The carry trade could become very fashionable again," said Martin Wiedmann, global head of foreign exchange sales at Credit Suisse.

A return of the carry trade would put further downwardpressure on the dollar, which has fallen more than 2 per cent in just a week against an international basket of currencies including the yen, euro and ­sterling. Yields on two-year US Treasuries have dropped to a record low of 0.5222 per cent.

Traders said the markets were pricing in a move to ease ­monetarypolicy further at the Fed's rate-setting meeting on Tuesday.

The falls in the dollar and Treasury yields have contrasted with a strong rally in share prices, powered by robust corporate earnings.

"Bonds and currencyinvestors have been reacting appropriately to the impending US economic slowdown and deflation scare. Equity markets are, as usual, asleep at the wheel," said Albert Edwards, global strategist at Société Générale.

Ben Bernanke, Fed chairman, said on Monday that there remained a "considerable way to go" before the US economy made a full recovery.

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