Traders rush to emerging markets currencies

By Vivianne Rodrigues - Analysis

NEW YORK (Reuters) - The dust had barely settled in the currency markets after the Federal Reserve's emergency interest rate cut on Tuesday when dealers went searching for one thing: yield.

Foreign exchange traders initially rushed to emerging markets currencies and sold the U.S. dollar after the Federal Reserve unexpectedly cut its federal funds rate by the most since 1984.

The move may be short-lived though, traders said. Another rate cut by the Fed at a meeting next week, may spark some dollar buying.

Actively traded emerging markets currencies such as Brazil's real, the Turkish lira, and the Mexican peso soared right after the central bank slashed the fed funds target rate by 75 basis points in an attempt to avert a recession in the world's largest economy.

The move comes amid a massive global sell-off brought on by deepening fears that a U.S. recession would drag the rest of the world economy down with it.

Traders said until the impact of the interest rate reduction and a tax cut plan proposed by the Bush administration are felt in the economy, returns for investors may be higher outside U.S. assets.

"Nobody knows how deep this recession is really going to be," said John Taylor, chief executive officer at FX Concepts Inc. in New York, which manages about $15 billion in currencies.

"Cleary the Fed and the government are determined to fight this aggressively, but for now, for most investors it may be safer to be out of the dollar."