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Tuesday March 18, 2008 - 12:02:39 GMT
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FOREX NEWS-Expectation of hefty Fed cut keeps dlr near lows

Tue Mar 18, 2008 7:38am EDT

(Changes byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON, March 18 (Reuters) - The dollar eased back towards the previous day's record lows versus the euro on Tuesday on expectations of a hefty Federal Reserve rate cut that will make the U.S. currency the second lowest yielder in the G10.

Markets are pricing in a cut of at least 100 basis points to the Fed's benchmark lending rate from the current 3 percent and are giving a 1-in-5 chance of an even bigger 125 basis points.

Expectations of rate cuts have deepened after JPMorgan's (JPM.N: Quote, Profile, Research) purchase of stricken rival Bear Stearns (BSC.N: Quote, Profile, Research) for a rock-bottom $2 a share and the Fed's emergency step of cutting its discount rate by 25 basis points on Sunday spooked markets.

On Monday, the dollar tumbled to record lows versus the euro, Swiss franc and a basket of major currencies, and fell further below the psychological 100 yen mark.

It remained on the back foot on Tuesday, although a little off those lows.

"Markets have stabilised but that's not changing the fundamental situation in the U.S," said Geoffrey Yu, FX stategist at UBS in Zurich.

"There is speculation the Fed could cut rates by 100 basis points. That's going to put the U.S. as the second lowest yielding currency in the G10, below even the Swiss franc. We might be entering the stage when people will be looking at the dollar as a funding currency," he added.

By 1124 GMT the euro was up half a percent at $1.5813, moving back towards Monday's record peak of $1.5904 <EUR=>.

The dollar was down a similar percentage against a basket of six major currencies .DXY at 71.117.

Illustrating the market's focus on yield, the Australian <AUD=> and New Zealand <NZD=> dollars -- with interest rates of 7.25 and 8.25 percent respectively -- were among the day's biggest gainers.

The Canadian dollar, meanwhile, rose to session highs versus the greenback as above-forecast February core inflation data was seen limiting the scope for future rate cuts <CAD=>.

The dollar was flat on the day versus the low-yielding yen but, at 97.40 yen, stayed well under the 100 mark breached last week <JPY=>. It also remained below parity at 0.9843 Swiss francs <CHF=>.

The yen showed a relatively muted reaction to the Japanese government's nomination of a former top finance ministry official, Koji Tanami, as its second candidate to run the Bank of Japan after Toshihiko Fukui retires on Wednesday.


The global credit squeeze continued to be reflected in short-term money markets, with overnight U.S. dollar deposit rates rising as high as 3.85 percent on Tuesday, having moved above 4 percent on Monday <USDOND=>

The dollar's sharp sell-off on Monday led traders to fret about the possibility of joint dollar-buying intervention by U.S., Japanese and European authorities.

Japan's top financial diplomat, Naoyuki Shinohara, said he was told by Prime Minister Yasuo Fukuda to keep in close contact with other Group of Seven members on developments in global financial markets.

European Central Bank have recently expressed concern about "excessive" moves in currencies, but analysts say the ECB may be willing to accept the strong euro to help rein in inflation.

The ECB's main task is to keep prices stable and avoid second round inflation effects, Executive Board member Lorenzo Bini Smaghi told a Brazilian newspaper, adding that exports have held up well in recent years despite the rise in the euro.

Some companies though are clearly being hit. The head of French aerospace industry association said a euro at $1.60 would be unbearable and could cause some companies in the sector to go bankrupt [ID:nPAC009370].

U.S. housing starts and producer price data for February are due at 1230 GMT, ahead of the 1815 GMT Fed decision.

Results from Lehman Brothers (LEH.N: Quote, Profile, Research) and Goldman Sachs (GS.N: Quote, Profile, Research), due for release before Wall Street opens, are also a focus.

"There's a lot of discussion that after the Bear Stearns collapse, no one is safe. So some reassuring news for the sector may have the ability to just take a little heat out of the situation," CMC Markets said in a note to clients.

© 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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