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Monday March 17, 2008 - 11:54:24 GMT
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FOREX NEWS-Dollar in a tailspin despite Fed action

Mon Mar 17, 2008 7:47am EDT

(Changes byline, updates prices, adds quotes)

By Veronica Brown

LONDON, March 17 (Reuters) - The dollar plumbed fresh depths across the board on Monday as liquidity-boosting measures launched by the Federal Reserve over the weekend failed to quell worry about the health of the U.S. economy and financial sector.

Stricken Bear Stearns is being bought by rival JP Morgan Chase for just $2 a share -- versus Friday's closing price above $30 -- in a sign that even heavyweights of the financial sector can be brought down by U.S. subprime mortgage debt and the resulting credit crunch which took hold last summer.

The Federal Reserve took more emergency measures to stem the fast-spreading financial crisis, cutting its discount rate by 25 basis points to 3.25 percent on Sunday and opening up discount window lending to major investment banks, a tool not used since the Great Depression.

But the moves did not stop the dollar from tumbling as much as 3 percent to below 96 yen, its lowest since 1995 and bringing year-to-date losses to more than 13 percent.

"The dollar is suffering from the dual shock of an economic slowdown and a financial crisis," said Teis Knuthsen, head of FX research at Danske Markets in Copenhagen.

"Until we see signs of an improvement on one of these two fronts, ideally both, then the dollar will remain under more pressure," he added.

The dollar fell as low as 95.77 yen according to Reuters data <JPY=>, and set a historic trough at 0.9637 Swiss francs <CHF=> after breaking below parity last week.

Implied volatility -- a key component of option prices -- in dollar/yen surged to its highest levels in around a decade both on the one-week <JPYSWO=> and one-month <JPY1MO=> horizon.

The euro rose as high as $1.5904, having already added around 4 percent in the first two weeks of March, roughly doubling its year-to-date gains <EUR=>. It later pared those gains to $1.5768 by 1121 GMT.


The rapid dollar falls also fanned talk of possible co-ordinated dollar-buying intervention from major central banks, or at least of increased rhetoric in criticism of the currency moves.

"From the ECB point of view, these are moves which are not easy to ignore," Dresdner Kleinwort currency strategist Michael Klawitter said.

Central banks in Europe, Japan and the U.S. last jointly intervened in September 2000, propping up the euro after the currency hit an all-time low below $0.85, a loss of nearly 30 percent of its value since its January 1999 launch.

This time though they have so far kept to words, with Japanese Finance Minister Fukushiro Nukaga saying on Monday he is watching currency market moves in cooperation with authorities in the United States and Europe.

"Our feeling is that the timing is not ripe for this (intervention) to happen -- therefore it remains a low probability event," Danske's Knuthsen said.

"Although currency movements may seem excessive they are not the cause of volatility in stock and credit markets: rather the movements are the results of turmoil in other asset markets."

Further comments could come from ECB Executive Board member Juergen Stark at 1340 GMT and Swiss National Bank Chairman Jean-Pierre Roth at 1700 GMT. Also due are January data on U.S. capital flows at 1300 GMT and February industrial output.

Short-term U.S. Treasury yields fell to five-year lows as investors expect the Fed could slash overnight rates by up to 100 basis points by the end of its policy meeting on Tuesday.

"Either way the Fed faces a lose-lose situation, as a less than 100 bps rate cut will result in market disappointment and an intensification of growth concerns resulting in a dollar and equity market sell-off, whilst a 100 bps cut could see a limited market reaction," Calyon said in a research note.

Concerns about the U.S. financial system prompted some investors to shift their funds to what they considered as safe-haven commodities, boosting spot gold to a record peak above $1,030 per ounce <XAU=>. Oil CLc1 hit a historic $111.80 a barrel.

Shares suffered as the Nikkei stock average .N225 fell 3.7 percent to its lowest close since August 2005, helping shave 3.25 percent off the value of European equities . Banking stocks were particularly bad hit.

(Editing by Ruth Pitchford)

© 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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