Wednesday January 30, 2008 - 21:43:48 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar tumbles as Fed slashes U.S. interest rates
(Updates prices, adds details)
By Steven C. Johnson
NEW YORK, Jan 30 (Reuters) - The dollar sank to a two-month
low against a basket of currencies on Wednesday after the
Federal Reserve cut benchmark interest rates a half percentage
point and warned more may be needed to support the faltering
The move comes just eight days after the U.S. central bank
unexpectedly cut its lending rate by three quarters of a point
to boost an economy battered by a deep housing slump and a
persistent credit crisis.
"The language in the (Fed's) statement was fairly strong,
suggesting the Fed is still worried with the possibility of
further deterioration in the U.S. economy," said Mark Meadows,
analyst at Tempus Consulting in Washington, D.C.
The cumulative 1.25 percentage point reduction in less than
10 days brings rates to 3 percent, a percentage point below
euro-zone rates and among the lowest in the developed world.
Dealers reacted by pushing the New York Board of Trade's
U.S. dollar index, which measures the greenback against a
basket of six major currencies, to a two-month low .DXY.
The euro surged 0.8 percent to $1.4906 <EUR=>, not far from
its all-time high around $1.4967, according to Reuters data,
before easing to $1.4877. Sterling lunged higher by more than a
cent and last traded up 0.1 percent at 1.9914 <GBP=>.
The dollar also fell 0.6 percent to 106.40 yen <JPY=> and
hit a record low of 1.0824 Swiss francs <CHF=>, following U.S.
stocks lower after a CNBC reporter said he believed ratings
agencies may downgrade bond insurers MBIA Inc. (MBI.N: Quote, Profile, Research) and
Ambac Financial Group (ABK.N: Quote, Profile, Research) as early as today.
Traders said the market was watching to see whether the
euro could build on its momentum to rise above $1.50, though
some said it might take more tough talk from the European
Central Bank on inflation before that happens.
Unlike the Fed, the ECB has held interest rates at 4
percent throughout a credit crisis that began in mid-2007, and
policymakers have continued to focus on inflation risks.
STRIKING A BALANCE
Some economists have also worried about the inflationary
impact of the Fed's aggressive monetary policy easing campaign,
especially given the dollar's weakness in recent months.
But for now, analysts said the Fed was more concerned with
keeping the U.S. economy out of recession.
"This move is really designed to help financial markets
even if it allows inflation pressures to pick up later on down
the line," said Amo Sahota, president and head of global
research at HiFX in San Francisco.
Some analysts said the Fed's aggressive action puts it
ahead of the curve, and the dollar may rebound if the economy
starts to gain traction and avoids falling into recession.
"Let's face it, they were behind the curve before and now
they are trying to get to where they think they should be,"
said Ken Landon, G10 currency strategist at J.P. Morgan in New
York. "At some point, the market is going to wake up and
realize this is good for the U.S. economy."
Recent U.S. data has been mixed. Figures on home sales and
prices have been dismal, and a report on Wednesday showed the
economy in 2007 grew at the slowest pace in five years.
But a separate report revealing the U.S. private sector
added 130,000 jobs this month helped dispel some of the gloom
and raised hopes about the government's nonfarm payrolls data
on Friday. The median estimate in a Reuters poll of economists
calls for a 63,000-job gain.
Some investors said such data suggests the Fed may have
gone too far.
"Everyone knows that it takes a while for 75 basis points
to get through the economy, and by cutting 50 now, I just think
they're not leaving much room in the future," said David
Greenwald, partner at Scalene Capital in Newport Beach,
There are 100 basis points in a percentage point.
(Additional reporting by Vivianne Rodrigues, Gertrude
Chavez-Dreyfuss and Kevin Plumberg; Editing by James
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