Dollar falls on Bernanke rate cut signal, growth gloom

NEW YORK (Reuters) - The U.S. dollar fell on Tuesday as steps by the Federal Reserve to calm chaotic financial markets and a signal by Chairman Ben Bernanke that the central bank was ready to cut rates eroded some of its safe-haven bid.

Moves by the Fed to create a facility to buy commercial paper caused investors to sell the yen in favor of some European currencies that had been hammered on worries about the health of the global economy and lack of a coordinated response to the financial crisis from Europe.

In remarks to the National Association for Business Economics, Bernanke opened the door to further monetary easing, highlighting the fact that recent economic data and financial developments showed the outlook for growth has worsened.

"That could be viewed as undermining the U.S. dollar. The expectation was that ECB was going to cut, which would be negative for the euro," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York.

"Now with the Fed likely to cut and perhaps ahead of the ECB, this is being viewed a neutral and even dollar negative."

The Fed has cut its overnight lending rate by 3.25 percentage points to 2 percent, while the European Central Bank raised the cost of borrowing by 25 basis points to 4.25 percent.

However, ECB chief Jean-Claude Trichet last week signaled the central bank was ready to start cutting rates.

The euro rose as high as $1.3739, rebounding from a 13-month trough around $1.3444 hit on Monday. That decline was sparked by escalating worries about the health of European banks.

In late New York trade, the euro was up 0.8 percent at $1.3599. The euro also rose 0.8 percent to 137.90 yen.

The ICE Futures U.S. dollar index, which tracks the greenback against a basket of six currencies, was last down 0.7 percent to 81.107 .DXY.

STOCKS CONTINUE TO SINK

Analysts said investors were also unnerved by the continued decline of stocks on Wall Street despite measures by the Fed to free up seized short-term lending markets.

Against the yen, the dollar dropped 0.4 percent to 101.40 yen as U.S. stocks plunged in their fifth straight declining session as fears mounted that the spiraling credit crisis would drag the economy into a deep recession.

The slide capped the biggest five-day point loss ever for the Dow Jones industrial average, which has lost more than 1,400 points over the past five sessions, nearly 13 percent of its value.

Concerns about the U.S. economy were also highlighted in minutes from the Fed's September 16 policy meeting, which showed participants saw intensified financial strains weighing on growth. Some participants said "policy response" might be necessary if financial strains hurt growth.

The dollar has benefited from views that growth outside the United States would slow, causing both domestic and international investors to liquidate assets in mostly emerging markets and buy safe-haven U.S. Treasury bills.

Analysts said the dollar still remained a safe-haven, but cautioned that it could fall further against the euro as its recent rally was seen as slightly overdone. They added that the ongoing credit crisis has started to impact the currency.

"The dollar is starting to become the victim to this (credit crisis)," said Greg Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"Over the past week, investors were looking to euro as a mechanism to put dollars back on the balance sheet. Now with failure of ... a consensus among central bakers on what to do, the dollar will now begin to suffer and in all likelihood trend back to 1.40 (against the euro)."

Overnight, the Reserve Bank of Australia stunned the market with a 100-basis-point rate reduction, stoking speculation that other central banks would follow suit in a coordinated move to combat the global credit crisis.

That move resulted in the Australian dollar getting hammered against its U.S. counterpart. The Aussie was last down 2 percent at US$0.7052, while the New Zealand dollar tumbled 1.4 percent to US$0.6233.

(Reporting by Lucia Mutikani; Editing by Dan Grebler)