Dollar falls to record low vs euro after Fed rate cut

By Vivianne Rodrigues

NEW YORK (Reuters) - The dollar tumbled to an all-time low against the euro on Tuesday after the Federal Reserve aggressively cut interest rates to prevent financial market turmoil from seeping further into the U.S. economy.

Traders sold dollars as lower rates make dollar-denominated fixed-income assets less attractive.

The greenback fell against the British pound and shed more than 2 percent against the high-yielding Australian and New Zealand dollars, while the dollar index hit a 15-year low .DXY after the Fed's rate announcement.

Policy-makers reduced the benchmark lending rate among banks to 4.75 percent, the biggest cut since November 2002 and its first cut in four years.

That left U.S. official borrowing costs at their lowest level since May 2006. The Fed also lowered the discount rate it charges for direct loans to banks by a half-percentage point.

Financial markets had widely expected the Fed to cut rates by at least 25 basis points, but were split on the chances of a more aggressive cut.

"A 50-basis-point cut in the funds rate and the discount rate is a brave opening gambit in the easing cycle from a Fed chairman that for credibility reasons was expected to err on the side of caution," said Alan Ruskin, chief international strategist at RBS Greenwich Capital, in Greenwich, Connecticut.

He also said the move will cause some to question the Fed's inflation-fighting credentials.

The euro was 0.8 percent higher against the dollar to trade at $1.3970, after earlier trading at a record high of $1.3980. The dollar index, which tracks the greenback's movements against a basket of six currencies, slid to a fresh 15-year low of 79.171.

The Fed move sparked a rally in U.S. stock indexes, but long-dated U.S. Treasury debt prices sank, prompting investors to move back into risky carry trades often financed by cheaply borrowed yen.

The dollar rose more than 1 percent against the Japanese currency and last traded at 116.14 yen. The euro gained 1.8 percent to 162.54 yen EURJPY=, its highest level since before the credit crisis grew in mid-August.

High-yield currencies gained along with investor risk appetites, with the New Zealand dollar rising 2.5 percent to $0.7236 and the Australian dollar up 2.2 percent at $0.8522.

The dollar also fell more than 1 percent against the Canadian dollar to trade at 1.0134, a 30-year low. Some analysts said recent oil price highs above $80 and lower U.S. interest rates may soon push the greenback to parity with its Canadian counterpart, a level last seen in 1976.

The worst housing slump in 16 years and a credit crunch that hurt large U.S. and European mortgage lenders led to a sell-off in financial markets over the past month and increased fears that the world's largest economy would stall.

"The accompanying statement sounds a somewhat cautious tone, pointing out the Fed is a bit more worried about the fallout from the recent financial market turmoil," said Omer Esiner, market analyst at Ruesch International in Washington.

(Additional reporting by Nick Olivari and Steven C. Johnson)