Dollar dives to new low against euro after Fed rate cut

16 hours ago

NEW YORK (AFP) — The dollar slid to new lows against the euro and the pound Wednesday after the US Federal Reserve cut a quarter-point from interest rates.

The single European currency topped the 1.45 dollar level for the first time, reaching 1.4504 dollars after the Fed's widely anticipated short-term rate cut to 4.50 percent.

Around 2200 GMT, the euro was at 1.4480 dollars, up from 1.4439 here late Tuesday.

The dollar edged up to 1.1583 yen from 1.577 but fell heavily against the pound. The British currency rose to 2.0809 dollars in late trade from 2.0676 Tuesday. Earlier it had climbed to a record 2.0811 dollars.

The Fed, as widely expected, lowered its base federal funds rate by a quarter of a percentage point to 4.50 percent.

In an accompanying statement to its second rate cut in as many months, the Federal Open Market Committee said that although financial market turmoil linked to a US housing downturn had eased in part, "the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.

"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time."

The Fed slashed its federal funds rate by a half point to 4.75 percent on September 18 to ease a credit crunch tied to the housing slump.

Kathy Lien, chief strategist of Forex Capital Markets, said the latest Fed move was "giving the financial markets exactly what they wanted and nothing more."

"Over the next three to six months we are still looking for the EURUSD to rise above 1.50" dollars, she added.

Speculation mounted about whether the Fed would cut rates again in December.

"Even the idea of a pause in December doesn't support the dollar," said David Gilmore, an analyst at Foreign Exchange Analytics.

"Even if there is a pause, most people feel the Fed will be back cutting rates in the first quarter 2008. The market thought the economy was worse than the Fed believed."

Andrew Busch of BMO Capital Markets also predicted the dollar was headed lower.

"This action and statement may ignite a much larger US dollar sell-off," Busch said.

"While some would say that the structure of the US yield curve strongly suggests that short-term rates are too high, I believe that long-term rates are too low and don't reflect the stronger-than-expected economic growth and a Federal Reserve strongly erring on the side of additional liquidity."

Eurozone borrowing costs stand at 4.00 percent, following a long rise from 2.0 percent that began in December 2005. British interest rates currently stand at 5.75 percent.

Meanwhile, a Bank of Japan decision Wednesday to leave its minimal interest rates unchanged at 0.50 percent had been expected and was priced into the markets, dealers said.

The greenback was briefly bolstered by surprisingly strong quarterly US economic growth, traders said. The Commerce Department estimated growth of 3.9 percent in the third quarter, up from 3.8 percent in the second quarter and sharply higher than Wall Street forecast of 3.1 percent.

In late New York trade, the dollar was at 1.1583 Swiss francs, up from 1.1577 late Tuesday.