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Wednesday December 12, 2007 - 11:54:56 GMT
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FOREX NEWS-Dollar falls vs euro after Fed cut disappoints

Wed Dec 12, 2007 6:36am EST

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, Dec 12 (Reuters) - The dollar fell versus the euro on Wednesday after the previous day's quarter-point rate cut from the Federal Reserve disappointed investors hoping for more aggressive action to help the economy and credit markets.

The Fed trimmed both the benchmark fed funds rate and the discount rate for lending to banks by a quarter point, to 4.25 and 4.75 percent respectively. Some had expected a bigger discount rate slash to help strained money markets at year-end.

"The Fed delivered the bare minimum of what was possible and they didn't reduce the penalty on the discount rate," said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.

"The Fed's actions are consistent with a central bank that was late to the easing cycle and is behind the curve and we see pressure on the dollar in coming weeks."

However, the U.S. currency rallied versus the yen, while high yielders surged after a Fed source said the central bank was actively considering all of the tools it has available to address liquidity measures.

Some media reports said action from the Fed on liquidity could come within days, even as soon as Wednesday.

The year-end period traditionally sees thinner liquidity, but the situation is exacerbated this year by troubles in the U.S. subprime mortgage market and the subsequent credit crunch, which have left banks unwilling to lend to each other.

The euro rose 0.3 percent to $1.4695 <EUR=>, while sterling added 0.5 percent to $2.0430 <GBP=>.

The high-yielding Australian dollar had rallied around 1.3 percent versus the U.S. currency <AUD=>, while the New Zealand dollar was up 1.6 percent <NZD=> by 1116 GMT.

The yen, which is a popular funding currency for carry trades and tends to move inversely with high-yielders, fell 0.5 percent to 111.07 per dollar <JPY=>. The euro was up 0.75 percent at 163.20 yen <EURJPY=>.

Trade was fairly thin as many market players keep positions limited before closing their books for 2007 later this month, while keeping an eye on whether conditions in money markets deteriorate further.


Investors will look to U.S. trade data for October at 1330 GMT for further clues on the outlook for the U.S. economy.

"Today's release ... could show a reversal of the recent improvements of the U.S. trade deficit as the impact of high oil prices becomes visible," said Dresdner Kleinwort in a note to clients.

"Consequently, the dollar's structural problems could return more into the market focus at a time when uncertainty in U.S. asset markets may continue to dampen foreign demand for U.S. stocks and bonds."

In the United States markets have fully priced in one more rate cut in January and another by the end of April FEDWATCH.

Wednesday's calendar also includes Norway's latest rate decision at 1300 GMT.

At a time when British and Canadian central banks have joined the Fed in cutting rates, Norges Bank is expected to hike by 25 basis points to 5.25 percent as domestic growth has held up well despite troubles in the global financial markets.

Ahead of the decision, the Norwegian crown was up around a half of a percent at 5.4334 per dollar <NOK=>. (Editing by Stephen Nisbet)

© 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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