Global c.bank liquidity injection no cure for dollar

By Lucia Mutikani - Analysis

NEW YORK (Reuters) - Steps by the Federal Reserve and other central banks to pump liquidity into stressed credit markets will temporarily help the ailing dollar, but not provide a long-term cure as risks of a U.S. recession mount.

Analysts said the latest coordinated actions had reduced the chance of a steeper interest rate cut at the Fed's March 18 policy meeting, removing one potential drag on the dollar.

However, investors were likely to continue to shun the dollar due to a string of weak economic data and fears of a recession, raising risks of the greenback losing its status as the global currency of trade.

"I don't think this is an elixir for turning the dollar around. Markets have plenty of reason to keep selling dollars, based on the U.S. economy heading into recession -- if it's not already in recession," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

The Fed and other central banks announced a series of aggressive measures to boost liquidity in financial markets, giving the dollar a major lift against the yen and pulling it back from fresh all-time lows versus the euro.

Analysts attributed the dollar's recovery on Tuesday to investors reducing bets against the greenback. They added that there was little to hold back the euro from testing $1.55 and yen resuming its upward trend.

Recent data have painted a gloomy picture of the world's largest economy, with employment figures on Friday showing a contraction in non-farm payrolls for the second straight month in February.

"There are rallies during a bear market and this is what we are seeing. What ails the dollar, growth differentials and interest rate differentials, still remains in place," said Paresh Upadhyaya, portfolio manager at Putnam Investment Management in Boston.