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Thursday January 10, 2008 - 22:04:15 GMT
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FOREX NEWS-Bernanke candor sends U.S. dollar sliding

Thu Jan 10, 2008 4:26pm EST

(Adds details, updates prices)

By Lucia Mutikani

NEW YORK, Jan 10 (Reuters) - The U.S. dollar fell sharply on Thursday after Federal Reserve Chairman Ben Bernanke said the central bank was ready to take aggressive measures to support the U.S. economy against the steep housing slump.

The Fed stood "ready to take substantive additional action" if needed to support growth, but was not forecasting a recession.

That left investors betting that a half-percentage-point reduction in the federal funds rate was nearly guaranteed at the Fed's upcoming Jan. 30 policy meeting, sending the dollar tumbling.

The fed funds rate is currently at 4.25 percent after the Fed's easing cycle began in mid-September.

"People are playing the (interest) rate differential potential. The Fed looks more and more likely to cut by 50 basis points at its meeting at the end of the month, if not before, while the ECB appears to be relatively hawkish," said Dustin Reid, FX strategist at ABN-AMRO Bank in Chicago.

Bernanke's remarks were in contrast to those of his European Central Bank counterpart, Jean-Claude Trichet.

Trichet, citing persistent inflation pressures, indicated further policy tightening was likely in the euro zone, giving additional impetus to the euro.

In late trade, the euro was up 0.9 percent at $1.4798 <EUR=> after earlier seeing a session peak of $1.4814.

Investors were unconvinced that the ECB would raise interest rates in light of slowing growth in the common monetary area, helping to curb the euro's rise, analysts said.

The dollar dropped to an intraday low of 109.12 yen <JPY=>, before bouncing back to around 109.44 yen, about 0.3 percent lower on the day.

"The market was second-guessing the Fed after the nonfarm payrolls. There is little surprise that Bernanke would lean further towards a more aggressive Fed easing cycle," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

U.S. short-term interest rate futures are pricing in a roughly 90 percent chance of a half-percentage-point reduction in the Fed's benchmark overnight lending rate to 3.75 percent at month end, while a 25-basis-point-cut has been fully factored in.

An aggressive rate cut this month will wipe out the dollar's yield advantage against the euro. The ECB kept its benchmark interest rate at 4.0 percent, with Trichet indicating the bank was maintaining a tightening bias.

"Pressure on the dollar is going to be insurmountable," said Moran.

In the UK, meanwhile, the Bank of England left rates on hold at 5.50 percent, giving sterling some support, although its gains were limited as investors continued to fret about Britain's slowing economy.

The pound was up 0.2 percent at $1.9624 <GBP=>, while the euro gained 0.7 percent to 75.40 pence <EURGBP=>. Prospects for further monetary easing in the U.S. sparked a rally in the high-yielding Australian and New Zealand dollars.

The Australian currency jumped 1.5 percent to US$0.8961 <AUD=>, while the kiwi vaulted 1.7 percent to US$0.7850 <NZD=>.

© 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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