Dollar sinks to record low vs euro, currency basket

NEW YORK Wed Mar 12, 2008 4:22pm EDT

A woman pedals near by a currency exchange bureau in Paris February 27, 2008. REUTERS/Gonzalo Fuentes

A woman pedals near by a currency exchange bureau in Paris February 27, 2008.

Credit: Reuters/Gonzalo Fuentes

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NEW YORK (Reuters) - The dollar plunged to a record low against the euro and a basket of currencies on Wednesday amid uncertainty about the long-term impact of the Federal Reserve's recent efforts to inject money into cash-starved credit markets.

The greenback rallied on Tuesday after the Fed said it would lend primary dealers $200 billion in Treasury securities and accept a wider array of mortgage debt as collateral to ease tight credit conditions.

But those gains were wiped out on Wednesday when the euro climbed above $1.5550 for the first time in its nine-year history, as investors wondered whether the Fed's plan would be sufficient to revive credit markets and boost a struggling U.S. economy.

"My sense is that the Fed's credit facility was too little, with trillions of dollars in bad debt out there," said Paul Lennox, corporate treasurer at Custom House, the largest non-bank global payments and currency dealer in Victoria, Canada.

"So we're back to thinking that the Fed will cut by 75 basis points instead of 50. And they're probably not done from there just yet," he added.

On Wednesday, futures markets are still pricing in a 76 percent chance of a 75-basis-point easing at next week's Fed policy meeting.

The euro hit a record peak of $1.5559, according to Reuters data, before easing to around $1.5552, up 1.5 percent from late on Tuesday. It was the largest daily gain for the euro in more than two years.

Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said the dollar's turnaround on Wednesday amounted to "a reality check" for markets.

"The Fed's move addresses short-term liquidity issues, but doesn't address underlying credit concerns and the U.S. housing decline, which have not gone away," he said.

The New York Board of Trade's dollar index fell to record low at 72.204 .DXY., down 1.4 percent on the day.

ECB'S TOUGH INFLATION TALK

At a news briefing in Germany, European Central Bank President Jean-Claude Trichet said for the second time this week that he was concerned about excessive exchange rate moves. But his remarks did little to temper the euro's advance for the day.

The euro has risen 6.5 percent against the dollar so far this year and is up 18 percent over the past 12 months.

Other ECB officials on Wednesday also kept up their tough stance on inflation. ECB Executive Board member Juergen Stark said the bank will not tolerate a wage-price spriral.

The euro-zone refinancing rate, currently at 4 percent, is higher than the benchmark federal funds rate, which now stands at 3 percent.

Traders said the euro also got a boost overnight when data showed euro-zone industrial output rose by much more than expected in January, suggesting the ECB need not rush to lower interest rates.

Sterling hit a three-month peak at $2.0278, up more than 1 percent from late Tuesday.

The dollar also surrendered all of the previous day's gains against the yen, falling 1.6 percent to 101.68 yen, not far from an eight-year low around 101.40 yen. The dollar's fall versus the yen was the largest daily drop in more than two months.

Against the Swiss franc, it was 1.9 percent weaker at 1.0143 francs, just shy of a record low at 1.0136.

Also weighing on the dollar was Jordan's announcement on Wednesday that it was set to reduce the greenback's share in official foreign exchange reserves.

(Additional reporting by Steven C. Johnson; Editing by Jan Paschal)

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