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Wednesday January 30, 2008 - 21:43:48 GMT
Reuters - www.reuters.com

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FOREX NEWS-Dollar tumbles as Fed slashes U.S. interest rates

Wed Jan 30, 2008 4:19pm EST

(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 U.S. economy.

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, California.

There are 100 basis points in a percentage point. (Additional reporting by Vivianne Rodrigues, Gertrude Chavez-Dreyfuss and Kevin Plumberg; 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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