Dollar is down, but not out, as Fed cuts rates

By Steven C. Johnson

NEW YORK (Reuters) - The Federal Reserve's biggest emergency interest rate cut in more than two decades took a bite out of the U.S. dollar on Tuesday, but could end up helping both the currency and the U.S. economy rebound as early as this spring.

The U.S. dollar fell more than 1.0 percent against the euro, the biggest daily decline in at least a year, after the Fed sought to soothe fears of a recession by cutting its benchmark lending rate by 75 basis points to 3.5 percent.

The Fed's move pushed U.S. short term interest rates below the euro-zone's for the first time in more than three years, leaving investors with less incentive to buy U.S. debt over European.

But money managers believe that weakness in the U.S. economy will soon be felt in Europe and Asia, forcing global central banks to follow the Fed with interest rate cuts of their own.

Alan Wilde, who helps manage a $15 billion portfolio of fixed-income securities at Baring Asset Management in London, said the Fed now appears ahead of the curve and predicts that the European Central Bank will have to follow suit with a rate cut of its own, likely before the end of the second quarter.

"It seems we're back where we were in the early 2000s when the Fed was seen as proactive and fostering growth while other central banks were blinded to the need for policy easing and pursued tight policy that backfired and hurt long-term growth prospects," he said.

Wilde said his firm has started reducing its existing bets against the dollar, and will likely change those trades to anticipate strength in the greenback in the months ahead, an opportunity that he said would become even more attractive should the euro hit a new record high of $1.50.

Paresh Upadhyaya, a portfolio manager at Putnam Investments in Boston who oversees 30 billion in investments, has a similar view.