FOREX-Dollar slides, yen gains as bank worries weigh
(Updates prices, adds quotes, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 19 (Reuters) - The dollar retreated on Wednesday, surrendering gains made after a smaller-than-expected U.S. rate cut, while the yen rallied amid persistent worries about the health of the global financial sector.
The Federal Reserve slashed its fed funds target rate on Tuesday by 75 basis points to 2.25 percent, sparking a relief rally in equities, a tightening in a broad range of spreads, and triggering a rebound in the dollar.
However, the rise in risk appetite was fleeting, with investors selling equities and buying the low-yielding yen and safe-haven Swiss franc on Wednesday.
Investors remained concerned about problems in the banking sector despite taking some brief comfort from stronger-than-expected earnings reported by Lehman Brothers LEH.N and Goldman Sachs (GS.N) on Tuesday and Morgan Stanley (MS.N) on Wednesday.
"The markets are in a period of extreme nervousness, and the yen and Swiss franc will trade entirely as risk proxies," said Matt Kassel, director of foreign exchange at ING Capital Markets in New York.
"For the dollar, the path is still for lower rates. It's going to be tough for the euro to stay offered unless the European Central Bank joins the party and starts cutting rates," he added.
In early New York trading, the euro was up 0.4 percent at $1.5690, more than 2 cents below Monday's record peak of $1.5904 EUR=.
The dollar was down 0.6 percent against the yen at 99.39 yen JPY=, after trimming losses following the Morgan Stanley results. It hit a 13-year trough of 95.71 yen on Monday.
The dollar was also down 0.6 percent against the Swiss franc at 0.9960 francs CHF=.
STILL A BLEAK DOLLAR OUTLOOK
Analysts say the outlook for the dollar remains bleak with lower interest rates set to further cut the currency's yield appeal.
In its statement on Tuesday, the Fed indicated it could cut rates again, even though two voting members dissented against the depth of the latest move. Futures markets attached a 94 percent probability of a 50 basis point cut to 1.75 percent FEDWATCH.
Tuesday's rate cut is the latest in a series of extraordinary measures undertaken by the Fed to prevent the credit crisis from escalating.
On Sunday the central bank took the emergency step of cutting its discount rate by a quarter point and opened up discount window lending to major investment banks, a tool not used since the Great Depression.
It has also announced a range of operations in recent weeks designed to pump potentially hundreds of billions of dollars into the fragile banking system.
However, analysts remained skeptical.
"While markets have clearly taken some comfort from the last set of actions, we fear that the improvement in sentiment may be short-lived," said CitiFX in a research note.
"A severe recession in the U.S. is clearly underway and data are likely to continue to come in thick and fast, providing evidence to that effect."
Sterling, meanwhile, fell as minutes from the Bank of England's Monetary Policy Committee showed two of nine policymakers favored a rate cut this month, which added to speculation that UK rates are heading lower soon.
The pound fell as low as $1.9951 GBP= before trading back up at $1.9987. The euro rose as high as 78.83 pence, close to historic peaks and more than 7 percent higher this year EURGBP=. It last traded at 78.56 pence, up 0.9 percent. (Additional reporting by Simon Falush in London) (Reporting by Gertrude Chavez-Dreyfuss; Editing by Tom Hals)
