Dollar declines against euro

The dollar fell sharply against the euro yesterday after the Federal Reserve unexpectedly slashed its benchmark overnight lending rate by 75 basis points in a bid to allay market fears about a US recession.

The Fed's emergency move, precipitated by a global equities market rout, has wiped out the dollar's yield advantage over the euro. The Fed funds rate target is now at 3.5 percent.

"Under any other Fed this would not be a surprise, but this Fed has been reluctant to cater to market expectations," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

"This should support the euro in the short term, however our long-standing view is still that the US economy will rebound and help the dollar gain into the middle of this year."

The euro traded up 0.8 percent from late Monday at $1.4563, after briefly racing to $1.4592 shortly after the Fed's unscheduled announcement.

Against the Swiss franc, the dollar was down 0.8 percent to 1.0993 francs.

Against the yen, the dollar was up 0.3 percent at 106.30 yen, helped by a slight boost in sentiment for US equities.

The US currency earlier rose to its highest in a month against the euro as traders increased bets that economic growth in the euro region is slowing.

Plunging global stocks also spurred demand for the safest assets, with Treasury notes gaining the most since the Sept 11, 2001, terrorist attacks on the United States.

Two-year yields fell to the lowest since April 2004 after shares in Europe and Asia extended a slump that has wiped $5 trillion of value from the world's stock markets in 2008 .

Interest-rate futures show the market is increasingly betting on an interest-rate cut by the European Central Bank this year.

The implied yield on the three-month June futures contract yesterday fell 10 basis points to 3.84 percent.

Further dollar losses may be limited as the decline in global stocks may reduce the need for US asset managers to diversify out of the dollar, said Mansoor Mohi-udding, head of currency strategy at UBS AG in Zurich.

The Japanese currency fell in European trading against 14 of the 16 most-active counterparts as stocks rebounded.

Japan's central bank kept its benchmark interest rate at 0.5 percent yesterday, the lowest in the industrialized world.

Bank of Japan Governor Toshihiko Fukui said the central bank will raise interest rates gradually as long as the economy expands.

Agencies

(China Daily 01/23/2008 page17)