U.S. Dolalr Dumped As Rate Cut Short

US dollar dumped as rate cut short

http://www.theaustralian.news.com.au...55-643,00.html

James Glynn, Dow Jones Newswires | December 13, 2007

THE US dollar was dumped yesterday by investors disappointed by the Federal Reserve's decision to cut interest rates by just 0.25 percentage points on Tuesday instead of the 0.5 per cent many thought was needed to bolster confidence and liquidity.

The verdict against the Fed was swift, as rising risk aversion saw the Australian dollar plunge by almost US2c in early Asian trading before later regaining some composure.

The Fed Funds rate was cut by 25 basis points to 4.25 per cent, taking cuts since the onset of the sub-prime markets meltdown in August to a total 1 per cent. It also cut its discount rate by the same amount.

The easing of policy followed weeks of bad news from Wall Street with sub-prime writedowns mounting and banks issuing warnings that the US economy is on a slippery slope to recession.

Sally Auld, senior debt strategist at ANZ, said the Fed acted conservatively because it still perceived that inflation risks were present in the world's largest economy, despite market turmoil.

"Medium-term inflation risks are clearly more dominant in policy makers' thinking than any desire to be ahead of the curve in order to mitigate recession risks," she said.

Sue Trinh, senior currency strategist at RBC Capital, said the Australian dollar was able to bounce off its lows amid rumours the Fed was planning to announce further measures to steady investors' nerves.

Moves to bolster US market liquidity might soon follow its interest rate cuts, Ms Trinh said. Investors were disappointed that the Fed left liquidity injections out of its action plan on Tuesday.

"The Fed rumours are positive for the carry trade to recover," Ms Trinh added.

Stephen Halmarick, chief economist at Citigroup, said the Fed could well top up liquidity, encouraged in part by the normal end-of-year demand for funds from the markets.

At the close of domestic trading, the dollar was quoted at US87.63c, down from US88.71c late on Tuesday. Against the yen, the dollar was at Y97.275, down from Y99.17.

Buying of the Australian dollar by Japanese retail investors also gave the currency some impetus, although still leaving it well below its closing levels on Tuesday.

Comments by Reserve Bank of Australia deputy governor Ric Battellino also allowed the Australian dollar to stagger back from its one-week lows.

Mr Battellino said the currency's current levels were justified by strong economic fundamentals.