CORRECTED - FOREX-Dollar recovers post-Fed losses as stocks fall
(Corrects level of Fed rates in paragraph 3)
LONDON, Jan 31 (Reuters) - The dollar recovered from an earlier two-month low against a basket of currencies on Thursday as investor focus switched to troubles in the financial sector and away from the previous day's hefty U.S. interest rate cut.
Fitch Ratings on Wednesday downgraded the credit ratings for Financial Guaranty Insurance Company's (FGIC) main bond insurer unit, stoking worries about possible downgrades for other companies in the sector, like MBIA and Ambac.
U.S. equity markets -- which had been boosted by the Federal Reserve's 50 basis points rate cut to 3.00 percent -- reversed their gains, while the dollar benefited from repatriation flows as investors ditched risky investments.
"There was the knee jerk reaction you'd expect (to the Fed) with stock markets rallying, and risky assets rallying and the dollar under pressure. But the U.S. (stock) markets didn't hold onto their gains and a lot of the move's reversed," said Martin McMahon, FX strategist at Credit Suisse in Zurich.
"There's some more bad news on monolines which is spooking investor sentiment on the general financial sector... The dollar's been gaining in the past couple of weeks when stock markets are losing out as a kind of defensive play."
By 0826 GMT the dollar was up a third of a percent against a basket of major currencies at 75.272, bouncing up from an earlier two-month low of 74.972 .DXY.
The euro rose as high as $1.4914 in the aftermath of the Fed cut EUR=, but ran into tough resistance around that level, prompting a retreat back down to around $1.4850 EUR=.
The dollar hit a record low of 1.0798 Swiss francs CHF= before reversing the move in early European trade.
Stock moves have been a major driver for currencies, as investors see share markets as a barometer for risk.
Overall weakness in share prices has prompted market participants to unwind risky positions such as carry trades, in which the low-yielding yen and Swiss franc are used to finance purchases of higher-yielding assets elsewhere.
Highest yielders like the Australian AUD= and New Zealand NZD= dollars weakened against the U.S. currency and the yen.
Japan's Mizuho Financial Group said its subprime losses to end-December amounted to 345 billion yen. The financial sector will remain in focus next week, as the 2007 earnings reporting season kicks off amongst major European banks.
NEXT FOCUS - PAYROLLS Continued...
