NEW YORK, Dec 16 (Reuters) - The U.S. dollar tumbled versus the euro and the yen on Tuesday after the Federal Reserve cut its benchmark interest rates more than expected to a record low, further diminishing the appeal of the greenback.

The Fed cut its federal funds rate target to a range of zero to 0.25 percent from the previous target of 1.0 percent, and said it would use "all available tools" to dispel a year-long recession.

 

Financial markets had expected the Fed to lower rates by no more than three-quarters of a point.

"The dollar is falling against all major currencies... because it was a larger-than-expected cut," said Matt Esteve, a foreign exchange trader at Tempus Consulting in Washington.

"On one side, we effectively have a zero interest rate in the U.S., and on the other side, the Fed has sent a sign that they are ready to use all tools to help the U.S. economy out of recession," he added.

In late afternoon trading in New York, the euro was up about 3.0 percent at $1.4099, a 2 1/2-month high. It traded as high as $1.4144, more than five cents above its session trough of $1.3631.

The U.S. dollar had its biggest daily decline against the Swiss franc since 1995. It last traded 3.2 percent lower against the European currency at 1.1205 to the dollar <CHF=>.

Versus the yen, the dollar was down 1.6 percent to 89.06 <JPY=>, within a striking distance to a 13-year low against the Japanese currency.

The Fed's rate cut pushed the fed funds target to its lowest level on record, and the central bank said it would keep it at "exceptionally low levels for some time."

The surprise move put the Fed in unprecedented policy territory, but analysts mostly approved of the move"It's a highly unorthodox and creative step," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon in New York. "We think it's the best possible move for the U.S. consumer and for the financial market."

U.S. stocks rallied after the announcement, while the InterContinental Exchange's U.S. dollar index .DXY, which tracks the value of the greenback against a basket of six currencies, fell 1.8 percent to 80.628.

The Fed's rate cut move is "an incredibly strong public declaration that the Fed will throw everything it has in attempting to stabilize the financial and economic situation," Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co, told Reuters.

"After this 'wow' statement, there should be no question about policy willingness," he added.

The U.S. dollar also tumbled against the Australian and New Zealand dollars in a sign the Fed's move may be positive for risk appetite and riskier assets.

 

GOLDMAN SACHS, BANK OF JAPAN

Demand for the greenback started to dwindle earlier in the session as investors cut their exposure to risk after Goldman Sachsposted its first loss as a public company.

The dollar's sharp drop in recent days in particular against the yen has raised speculation that Japan may intervene to stem the currency's strength as it nears a 13-year high.

U.S. data released earlier on Tuesday showed new housing starts and permits plunged to record lows in November, while consumer prices dropped at a record rate for a second straight month.

Analysts and fund managers said the very soft readings on inflation and continued deterioration in the housing sector support views of a very expansionary policy stance.