Wednesday December 17, 2008 - 23:01:19 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar hits 13-1/2 year low vs yen, plunges vs euro
* Dollar hits 2-1/2 month low vs euro a day after Fed move
* Dollar plunges to 13-1/2 year trough vs yen below 88
* Fed's historic rate cut seen keeping dollar weak
* BoJ seen cutting rates later this week
(Adds comments, updates prices, changes byline)
By Vivianne Rodrigues
NEW YORK, Dec 17 (Reuters) - The U.S. dollar tumbled
against major currencies on Wednesday, hitting its weakest
level in more than 13 years versus the yen, a day after the
Federal Reserve cut interest rates to virtually zero.
The euro rallied to its strongest level against the
greenback this quarter after the U.S. central bank's massive
rate cut further widened the interest rate differential in
favor of the single euro zone currency.
"The Federal Reserve is prepared to flood the system with
liquidity. We've pretty much gone to a zero interest rate
structure," said Tom Fitzpatrick, global head of FX strategy at
Citigroup Inc. in New York. "Neither of those are very
supportive of the dollar."
In a sign of the huge volatility that has roiled the
currency market since summer, the dollar abruptly reversed its
upward trend of the past four months.
Its current trajectory puts the dollar index, which
measures the greenback against a basket of six currencies, on
pace for its biggest weekly loss in about 35 years, according
to Reuters data. It is down about 5.5 percent on the week.
Fears have risen that the Fed's rate cut further diminished
the yield appeal of the U.S. currency, making dollar assets
less attractive. The greenback also came under pressure on
worries the increase in the supply of money in the financial
system would erode the dollar's value, analysts said.
In late afternoon trading in New York, the euro rose to a
new two-and-a-half month high at $1.4436, according to Reuters
data. It was last up 2 percent at $1.4383 <EUR=>, and has
rallied about 13 percent so far this month.
"The Fed has been progressively more aggressive in
attacking the dollar," said Axel Merk, manager of the Merk Hard
Currency Fund in Palo Alto, California. "Low interest rates are
the traditional policy tool to make a currency less
The Fed on Tuesday cut its federal funds rate target to a
record low, setting a range of zero to 0.25 percent compared
with the previous level of 1.0 percent. That contrasted with
the more cautious approach of the European Central Bank, which
recently hinted that it may not cut again in January.
"The fact that the Fed made this major policy move
yesterday really changed the balance of power towards the euro
for the time being," said Boris Schlossberg, director of
currency research at GFT Forex in New York. "The underlying
story in the FX market remains yield."
EYES ON BOJ
Against the yen, the dollar fell to 87.15 yen <JPY=>, the
lowest since mid-1995. It was last down 1.7 percent at 87.38.
The move stoked speculation that Japanese authorities may
intervene to rein in the yen's strength. Japan's top financial
diplomat said on Wednesday that rapid movements in currency
markets are undesirable [ID:nTKU003256].
The Japanese currency has rocketed in recent months as
investors unwound carry trades, cutting exposure to riskier and
higher-yielding assets as the financial crisis mushroomed. The
dollar has lost nearly 9 percent against the yen this month and
18 percent this quarter.
The yen's rally picked up momentum after the Fed's move
brought U.S. interest rates below the Bank of Japan's target
for the overnight call rate -- now at 0.30 percent -- for the
first time in well over a decade.
The BoJ starts its two-day monetary policy meeting on
Thursday. Two-thirds of analysts polled by Reuters now expect
the BoJ to cut rates this week, and most of them see rates
falling to 0.1 percent. See [ID:nT238594].
(Additional reporting by Wanfeng Zhou in New York; Editing
by Chizu Nomiyama)
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