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Tuesday December 4, 2007 - 21:40:38 GMT
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FOREX NEWS-Dollar falls on speculation of aggressive Fed cut

Tue Dec 4, 2007 4:22pm EST

(Adds details, updates prices)

By Lucia Mutikani

NEW YORK, Dec 4 (Reuters) - The dollar fell against the yen and the euro on Tuesday on speculation the Federal Reserve could cut interest rates aggressively next week to calm market concerns over the credit turmoil and tightening liquidity.

This follows a surprise interest rate cut by the Bank of Canada, which heightened expectations the Bank of England could also ease monetary policy this week and backed the view that central banks were becoming more worried by the credit crisis.

The BoC cited expectations of more global financial market difficulties linked to the U.S. subprime mortgage market rout for its decision to cut its overnight lending rate 25 basis points to 4.25 percent.

"We have seen the U.S. dollar sell off against the euro, yen and the Swiss franc as expectations for a 50 basis points cut at the December 11 FOMC meeting have increased," said David Powell, currency strategist at IDEAglobal in New York.

Interest rate futures are pricing in a roughly 50 percent implied chance of a half percentage point Fed cut, while a 25 basis points cut to 4.25 percent has been fully factored in.

An aggressive cut would not only further reduce the appeal of dollar-denominated assets but leave the market more worried than it already was about the U.S economy, analysts said.

Late in New York, the euro was up 0.7 percent at $1.4765 <EUR=>. The dollar fell 0.7 percent to 109.73 yen <JPY=> and dropped 0.9 percent to 1.1160 against the Swiss franc <CHF=>, with investors reducing exposure to risk as liquidity tightens ahead of the year-end.

"Risk appetite remains very cautious at the moment. There isn't a really strong compelling reason for investors to hold too much risk right now going into year-end, when liquidity typically tightens up," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

The surprise BoC decision sent the Canadian dollar <CAD=> tumbling. The U.S. dollar jumped to a near 11-week high of C$1.0152 and was last at C$1.0122, up 1.2 percent on the day.

The high-yielding Australian dollar was knocked lower ahead of a verdict on interest rates by that country's central bank on Wednesday. It fell 0.8 percent to US$0.8732 <AUD=>.

Analysts do not expect Australia's monetary authorities to follow their Canadian counterparts.

"While it is likely too risky for the RBA (Australia) to follow suit, the BoE and ECB (European Central Bank) could just as easily surprise markets on Thursday with 25 basis points rate cuts of their own," said Michael Woolfolk, senior currency strategist at Bank of New York.

The Bank of England's rate decision is due on Thursday. Sterling <GBP=> traded down 0.3 percent at $2.0587.

"We still believe the Fed will go 25 rather than 50, clearly because 50 basis points might get the market even more concerned than it actually is on the downside risks to growth," said Standard Chartered's Moran.

Liquidity in some credit markets is now at its tightest in years, as banks' risk aversion and reluctance to lend are exacerbated by a seasonal lack of liquidity.

One-month interbank lending rates in the euro (Euribor) rose to near seven-year highs on Tuesday, while one-month sterling London interbank rates (Libor) fixed at a 9-year high. (Editing by James Dalgleish)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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