The dollar plunged, government bond yields soared and the price of oil hit a record high on Thursday amid growing concern that interest rate cuts by the Federal Reserve could stoke inflation.

The gyrations came as Ben Bernanke, Fed chairman, told Congress that the 50 basis point cut in rates this week was a pre-emptive move to prevent market turmoil from harming the economy.

He said the Fed cut rates “to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy”.

Without giving a steer as to the likely direction of the next rate move, Mr Bernanke signalled that the Fed would “keep re-assessing our outlook and adjusting policy” as needed to meet its goals of price stability and full employment.

Hank Paulson, Treasury secretary, told Congress that the Fed’s decision to cut interest rates “helped to stabilise financial markets”.

The rate cut has alleviated some of the strain in money markets. But it also has aroused concerns about inflation, even though most inflation measures remain below the levels reached during last spring’s inflation scare.

The dollar on Thursday fell to its lowest level since 1992 against a basket of six currencies on worries that lower US rates would erode the value of dollar assets. 

The Canadian dollar rose to parity against the US currency for the first time since 1976. The US dollar fell through the $1.40 level to a record low against the euro.

Tony Crescenzi, chief bond market strategist at Miller Tabak, said the dollar’s decline looked “rapid and disorderly”.

Oil prices set another record high of $84.10 a barrel, while gold traded as high as $738.30 an ounce, the highest level since February 1980. For the second day running, the 30-year bond price fell two points, with the yield rising to a high of 4.98 per cent. The yield has risen from 4.70 per cent at the start of this week.

Meanwhile, a measure of inflation expectations closely followed by the Fed, in the Treasury inflation protected securities market, set a new high for this year. The forward five-year Tips break-even rate rose to 2.63 per cent on Thursday, up from 2.53 per cent before the Fed’s rate cut.

“The market is becoming more concerned about the Fed’s inflation-fighting credibility,” said Michael Pond, inflation-linked strategist at Barclays Capital.

Traders also speculated that some of the rise in bond yields reflected the sale of Treasuries used as hedges against holdings of mortgage-backed securities. Investors buy Treasuries to protect themselves against the risk that falling rates enable homebuyers to refinance mortgages.

On equity markets, the S&P 500 index fell 0.7 per cent.