Dollar rebounds after Fed liquidity move
NEW YORK (Reuters) - The dollar rebounded from record lows on Friday as a Federal Reserve liquidity injection fueled some speculation the central bank might hold off on cutting interest rates aggressively even after a sharp contraction in U.S. payrolls.
Profit-taking and short-covering also helped support the dollar, traders said, after three days of successive sharp gains in the euro, which brought the European currency to historic peaks.
The Fed announced a series of term repurchase operations totaling $100 billion to ease liquidity pressures in stressed financial markets, overshadowing a Labor Department report showing U.S. employers cut payrolls for a second month in February.
"The liquidity injections are key here," Firas Askari, head currency trader at BMO Capital Markets in Toronto, said of the dollar's climb. "Some people are thinking that the Fed may not be as aggressive (in cutting rates) and that they are going to inject liquidity in other ways."
Interest rate futures reflected reduced views of the chances of a 75-basis-points cut in the Fed's benchmark overnight lending rate at the March 18 meeting, to about 96 percent from about 130 percent earlier.
The fed funds rate target is currently at 3.0 percent after being lowered by 2.25 percentage points since mid-September.
After the February payrolls report the euro initially surged to as high as $1.5459, according to Reuters data. The 63,000 jobs decline was the biggest monthly drop in nearly five years, the Labor Department said. Economists surveyed by Reuters had forecast 25,000 jobs would be added to payrolls last month.
But the euro subsequently traded around $1.5345, down 0.3 percent on the day as investors considered the U.S. interest rate outlook.
The New York Board of Trade's dollar index, which tracks the dollar's performance against the basket of currencies, slumped to an all-time low of 72.462 .DXY. It later rebounded to around 73.039.
MARKET SHORT DOLLARS
"Everybody is short U.S. dollar, so I am not surprised to see some position-squaring," said Askari. "But don't kid yourself. This is a short-term bounce, a short-term correction," he said, adding that there was little to prevent the euro from making stabs at 1.55 against the dollar.
The greenback also slumped to historic troughs against the Swiss franc at 1.0136 Swiss francs, before recovering to trade up 0.1 percent at 1.0243 Swiss francs.
Against the Japanese yen, it dropped to its lowest in eight years at 101.44, before regaining ground to trade flat at 102.78 yen.
"The dollar was clearly oversold this morning even before the payrolls report and as soon as that came we started to see flows from Europe putting a cap on euro gains at around 1.5450," said Gregory Salvaggio, a currency trader at Tempus Consulting in Washington D.C.
"That, combined with the Fed's announcement on extra repo lines, gave the market a bit of a breather. It seems the central bank is at least aggressively monitoring liquidity."
The Fed said it would increase amounts in its Term Auction Facility auctions on March 10 and March 24 to $50 billion each, a rise of $20 billion from the amounts announced for each of these auctions.
The measures might ease pressure on the Fed to cut interest rates steeply. Aggressive monetary easing has erased the dollar's yield advantage against currencies like the euro.
The European Central Bank has kept its refinancing rate at 4 percent, citing rising inflation pressures. ECB President Jean-Claude Trichet on Thursday dashed expectations of a rate cut any time soon, with the central bank upwardly revising its inflation forecasts.
(Additional reporting by Lucia Mutikani; Editing by Kenneth Barry)
