Dollar slips further amid rate cut expectations

By Lisa Twaronite, MarketWatch

Last Update: 1:48 PM ET Oct 10, 2007

SAN FRANCISCO (MarketWatch) -- The dollar slipped against its major counterparts Wednesday, a day after minutes from the Federal Reserve's Sept. 18 meeting reinforced some investors' expectations that another interest rate cut is coming later this month.

The minutes showed Fed officials voted unanimously for the half-percentage point rate cut and called it "the most prudent course of action," and said that future actions would depend on how the economy fared in coming weeks. Read The Fed.

"[N]otwithstanding the lack of a formal easing bias, policymakers are clearly more worried about the economy than inflation, which is why they voted unanimously to ease 50 points with nary any talk of dissension," wrote Sal Guatieri, economist at BMO Capital Markets.

"Since the last policy meeting, dismal housing data, still wide short-term credit spreads, and an established slowing trend in private-sector employment would seem to weigh towards another reduction" of a quarter point at the next Fed meeting Oct. 31, he said.

Lower interest rates erode returns on dollar-denominated assets and therefore weigh on the greenback.

The dollar index, which measures the greenback against a basket of major currencies, was at 78.315, down from 78.470 in late U.S. trading Tuesday.

The euro rose to $1.4139, up from $1.4106 late Tuesday.

The dollar was buying 117.00 yen, down from 117.08 yen Tuesday.

Japan has the lowest interest rates in the developed world, with its benchmark set at 0.5%.

The Bank of Japan will begin its monthly policy meeting Wednesday and is widely expected to keep interest rates steady. See full story.

A survey compiled by Japan's Cabinet Office's Economic Planning Association released Tuesday showed that private-sector economists expect the BOJ to raise interest rates either in December or February, the Nikkei reported.

Ten respondents said interest rates will be lifted in December, while another 10 predicted that a hike will take place in February. In the previous survey, 15 respondents forecast a rate increase in October. More economists now believe that the rate hike will be delayed due to the U.S. subprime loan crisis.

What rate cut?

While the dollar remained under pressure after the Fed minutes, some analysts said that the scenario revealed in the minutes didn't send a clear signal either way. Some even said a further cut was now less, not more, likely.

In fact, Treasurys continued to fall Wednesday, as investors in that market increasingly priced in expectations that another cut is not forthcoming. See Bond Report.

"[Y]esterday's less pessimistic FOMC minutes...reinforce our view that an October cut is not a done deal and have lowered market expectations of an October cut from 50% to 36%," noted currency strategists at Brown Brother's Harriman.

Eric Rosengren, the new president of the Boston Federal Reserve Bank, said in a speech Wednesday that the effect of the problems in housing on consumption has been muted to date. But he said if housing prices fall further or if the price declines spread across the country, this "would increase the risk of a more adverse impact on consumption." See full story.

Gold advanced further on Wednesday, in line with the weaker dollar. See Metals Stocks.

On Wall Street, stocks gave back some of Tuesday's record gains after blue-chip aluminum producer Alcoa Inc. fell short of earnings estimates and International Paper Co. issued a profit warning. See Market Snapshot.