By Vivianne Rodrigues
NEW YORK Jan 22 The dollar tumbled against
major currencies except the yen on Tuesday after the Federal
Reserve unexpectedly slashed its benchmark overnight lending
rate in an attempt to allay market fears of a U.S. recession.
The Fed's emergency move to cut rates by three quarters of
a percentage point was precipitated by a global equities rout.
The U.S. central bank's move wiped out the dollar's yield
advantage over the euro, with the federal funds rate target now
at 3.5 percent and official euro zone interest rates at 4
percent. This put the European currency on track to post its
biggest one-day gain against the dollar in two years.
The cut, which preceded next week's Federal Open Market
Committee monetary policy meeting, was not enough to prevent
U.S. stocks from falling when the market reopened after
Monday's public holiday. For details see [.N].
"We are skeptical that the rate decision will have a
lasting impact in offsetting concerns over economic slowdown,"
Tom Fitzpatrick, global head of foreign exchange at Citigroup
in New York, said in a note to clients. "Lower interest rates
do little to address underlying weakness in the U.S. housing
sector and broader economy."
In New York late afternoon trade, the euro was up 1.2
percent on the day at $1.4613 EUR= after briefly racing to
$1.4643. The euro has rebounded from a one-month low against
the dollar of around $1.4366, according to Reuters data.
"Under any other Fed this would not be a surprise, but this
Fed has been reluctant to cater to market expectations," said
Mark Meadows, currency strategist at Tempus Consulting in
Washington. "This should support the euro in the short term,
however our long-standing view is still that the U.S. economy
will rebound and help the dollar gain into the middle of this
Tuesday's emergency step was the biggest Fed rate cut since
1984 and was the first intermeeting cut since Sept. 17, 2001.
Analysts said the bold cut had not changed market
projections for the dollar's recovery versus the euro in the
second half of the year.
"The aggressive stance by the Fed together with some
stimulus package from the government could potentially insure
that the economy bottoms around the middle of the year," said
Matthew Strauss, senior currency strategist at RBC Capital
Markets in Toronto.
"The moment we see that happening we could see a strong and
sustained rally in the U.S. dollar."
U.S. President George W. Bush has proposed a $145 billion
short-term stimulus package to minimize the impact of an
Against the Swiss franc, the dollar was down 1.1 percent at
1.0963 francs CHF=, while the pound rose 1 percent to $1.9615
The greenback was thumped against the high-yielding
Australian and New Zealand dollars. It last traded down 1
percent at US$0.8702 AUD= and dived 2.9 percent to US$0.7660
The dollar, however, fared better against the yen, with
analysts citing repatriation flows on the back of collapsing
equity prices as well as an improvement in risk appetite after
the Fed's rate cut.
It traded up 0.6 percent at 106.62 yen JPY=, after
earlier touching its lowest in more than two and a half years
against the Japanese currency.
Short-term interest rate futures were pricing in a
quarter-point rate cut at the Jan. 29-30 meeting and showed a
roughly 80 percent perceived chance of a 50 basis points cut.
The Fed has been cutting rates since mid-September.
(Additional reporting by Lucia Mutikani and Nick Olivari;
Editing by James Dalgleish)