Dollar posts biggest daily fall in 23 years

NEW YORK (Reuters) - The U.S. dollar posted its biggest one-day fall in 23 years on Wednesday, with the Federal Reserve delivering an interest-rate cut, easing investor concern about the world economy and reducing the need to repatriate dollars from riskier markets.

The Federal Open Market Committee lowered its key interest rate by a half-percentage point to 1.0 percent, the lowest level since 2004, in a move to prevent a widening financial market crisis from tipping the U.S. economy into a prolonged recession.

U.S. stocks ended slightly lower, after a huge gain on Tuesday, and a slide to a five year low earlier this month.

"Even a modest down day on stocks would be considered a victory for risk appetite in the bigger scheme of things, after yesterday's major gains," said Alan Ruskin, chief international strategist at RBS Global Banking & Markets in Greenwich, Connecticut.

"(The Fed) leaves the door open to further rate reductions, though plainly they are running out of interest rate bullets," he said.

In late New York trading, the euro was up 1.9 percent against the U.S. dollar at $1.2953. Against the yen, the euro rose 0.3 percent to 125.97 yen, well above recent six-year lows below 114 yen.

The Intercontinental Exchange's dollar index of major currencies was down 2.7 percent .DXY, its worst day since 1985.

The Fed is expected to lower benchmark interest rates further in the months ahead given a downbeat economic outlook in the Fed's policy statement on Wednesday.

Interest-rate futures contract prices reflect another quarter-point rate cut at the December Fed meeting, which would take the federal funds rate to 0.75 percent for the first time since 1958, with an outside chance that rates could be cut to 0.50 percent.

UNCERTAINTY REMAINS

The yen and the Swiss franc, on the other hand, rose against the dollar as market sentiment remained fragile against a deteriorating global economic backdrop.

The U.S. dollar was down 1.5 percent against the yen at 97.26 yen, having gained more than 6.0 percent on Tuesday, its biggest one-day rise in 34 years.

Vassili Serebriakov, currency strategist at Wells Fargo, said the Fed's "as expected" move may have disappointed those looking for a surprise.

"We believe that the Fed's actions can ultimately do little to reverse the global deleveraging/repatriation pressures," he said, in a note. "Thus, equity market bounces will essentially remain corrective while the dollar and the yen should continue finding buyers on pullbacks."

Samarjit Shankar, global FX strategist at The Bank of New York Mellon in Boston, said the next thing the market will focus on is the European Central Bank meeting next week, which is expected to provide investors with clues about futures interest moves in the euro zone.

"There is still a lot of uncertainty in the markets. Risk aversion is still very much in place. That would be dollar supportive in general, although right now you're seeing a lot of choppy price action," Bank of New York Mellon's Shankar said.

In other parts of the world, monetary policy has been a dominant theme too. China's central bank cut benchmark lending and deposit rates by 0.27 percentage point on Wednesday. In Japan, speculation grew that the Bank of Japan could cut rates on Friday to boost the flagging economy.

(Additional reporting by Gertrude Chavez-Dreyfuss;)