(Recasts after Fed decision, updates prices, adds comment)
NEW YORK, March 18 (Reuters) - The dollar posted its largest single-day gain against the yen in nine years on Tuesday and rallied against the euro after the Federal Reserve cut the benchmark U.S. interest rate by a less-than-expected 75 basis points to 2.25 percent.
Some investors had been betting the U.S. central bank could cut by as much as 100 basis points. Lower rates typically reduce the attractiveness of dollar-denominated securities and stem demand for the dollars to buy them.
Analysts said while the cut was smaller than expected, there were likely more to come.
“People are still reacting to the Fed cutting 75 basis points rather than the 100 (basis points) the market had priced in,” said Camilla Sutton, currency strategist at Scotia Capital in Toronto by telephone. “It’s a small positive move.”
The dollar was up 2.43 percent on the day versus the low-yielding yen but, at 99.55 yen, stayed under the 100 mark breached last week JPY=. It was the largest one-day percentage advance since Feb 16, 1999, according to Reuters data.
The dollar also managed to break back above parity against the Swiss francs CHF= at 1.0013 Swiss francs.
The euro was down 0.6 percent at $1.5635, it was the largest one-day percentage loss for the euro in six weeks. Monday's record peak for the euro/dollar was $1.5904 EUR=.
The Fed’s action takes the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005, and comes two days after the central bank announced the latest in a series of emergency measures to stem a fast-spreading global financial crisis. The Fed has now cut rates a full 3 percent since September.
The Fed said in the statement accompanying the rate cut decision that “recent information indicates that the outlook for economic activity has weakened further” while “inflation has been elevated, and some indicators of inflation expectations have risen.”
“The U.S. dollar is now the second lowest yielding currency in the developed world thanks to the Federal Reserve’s 75 (basis point) rate cut,” said Kathy Lien, chief strategist Forex Capital Markets LLC in a research note. “If the US economy does not recover or liquidity problems do not ease, we still believe that the Federal Reserve could drop interest rates to 1 percent, which would come close to matching Japan’s levels.”
Dollar dealers also were reacting to the strength of the U.S. equity market, which were strong throughout the day and surged to new highs after the Fed action. The Dow Jones industrial average .DJI gaining 3.5 percent, while recently battered broader-based averages moved up even more.
The greenback pushed off some of its recent credit-related concerns on stronger-than-expected results from Goldman Sachs (GS.N) and Lehman Brothers LEH.N early in the session.
Demand for the Japanese yen tends to increase as investors’ aversion to risk grows. As U.S. stocks rallied, with investors willing to take on more risk, the dollar recouped some of Monday’s sharp losses versus the low-yielding yen.
The dollar’s sharp sell-off on Monday led traders to fret about the possibility of joint dollar-buying intervention by U.S., Japanese and European authorities.
European Central Bank officials have recently expressed concern about “excessive” moves in currencies, but analysts say the ECB may be willing to accept the strong euro to help rein in inflation.
The ECB’s main task is to keep prices stable and avoid second-round inflation effects, ECB board member Lorenzo Bini Smaghi told a Brazilian newspaper, adding that exports have held up well in recent years despite the rise in the euro. (Reporting by Nick Olivari and Vivianne Rodrigues. Editing by Richard Satran)