Dollar slumps in wake of Fed's emergency measures

NEW YORK (Reuters) - The U.S. dollar tumbled to a 12-1/2 year low against the Japanese yen on Monday, and also saw record lows against the euro and the Swiss franc, as emergency liquidity-boosting measures by the Federal Reserve over the weekend failed to ease worries about the U.S. financial system.

The greenback sold off in reaction to the Fed cutting its discount rate by 25 basis points to 3.25 percent on Sunday and after the opening up of the Fed's discount window lending to major investment banks, a tool not used since the Great Depression.

The Fed's move accompanied the purchase of Bear Stearns by JPMorgan Chase for just $2 a share, less than one-tenth of the bank's share price on Friday.

The U.S. dollar slid as much as 3.0 percent to below 96.00 yen, its lowest since 1995, bringing year-to-date losses to more than 13 percent.

"The Fed's announcement to triple the maximum maturity of discount window loans to 90 days and its $30 billion in funding of Bear Stearns less liquid assets not only indicated the grave situation posed to the counter party risk involved, but also highlights the increased ineffectiveness of the Fed's historic liquidity injections yet to date," said Ashraf Laidi, chief FX strategist, CMC Markets U.S. in a research note to clients.

The dollar fell as low as 95.77 yen according to Reuters data, and saw historic lows 0.9637 Swiss francs after breaking below parity last week.

The euro rose as high as $1.5904, having already added around 4.0 percent in the first two weeks of March, roughly doubling its year-to-date gains. It last traded at $1.5745.

Matthew Strauss, a currency strategist at RBC Capital in Toronto, said that despite the high levels in dollar-yen and rumors of possible intervention by the Bank of Japan, there were no clear indications the Japanese government is ready to take action to prevent the currency from appreciating further.

Implied volatility, a key component of option pricing, in dollar/yen surged to its highest levels in around a decade both on the one-week and one-month horizon.

In another report on Monday, the U.S. Treasury Department said net overall capital flows in the country fell to its lowest level in four months in January. The inflows were not sufficient to cover the month's U.S. trade deficit.

"Today's TICs report takes a back seat to tomorrow's FOMC's decision, with market expectations regarding the size of the anticipated cut all over the map," Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon, said in a note.

Short-term U.S. Treasury yields fell to five-year lows as investors expect the Fed could cut overnight rates by up to a full percentage point at its policy meeting on Tuesday.

INTERVENTION?

The rapid U.S. dollar fall fanned talk of possible coordinated dollar-buying intervention from major central banks other than the Bank of Japan.

"From the ECB point of view, these are moves which are not easy to ignore," Dresdner Kleinwort currency strategist Michael Klawitter said in Frankfurt.

The euro saw some volatility when Market News International, citing a source, said the European Central Bank's Governing Council will likely express concern about the euro's rapid surge against the dollar in a coordinated "verbal intervention" over the next several days and weeks.