Dollar eases ahead of Fed decision

Peter Garnham
Financial Times
Wednesday January 30, 2008

The dollar drifted lower on Wednesday as traders awaited the Federal Reserve’s decision on US interest rates later in the session.

Markets were pricing in an 85-per-cent chance that the Fed would follow up last week’s emergency 75 basis-point cut in its Fed funds rate with another 50 basis-point move to 3 per cent after its policy meeting at 19.15GMT.

The dollar eased 0.2 per cent to $1.4810 against the euro, lost 0.1 per cent to Y106.95 against the yen and fell 0.1 per cent to $1.9920 against the pound.

However, analysts said the spectre of the Fed’s decision should dampen volatility on the currency markets.

“The Fed interest rate decision is the key event today and markets are likely to tread water ahead of the decision,” said Mitul Kotecha at Calyon.

He said he expected the central bank to cut its Fed funds rate by 50 basis points, which could give market sentiment a boost since it was not fully priced into the market.

However, Mr Kotecha said he continued to believe that the dollar was unlikely to weaken much further from current levels.

“Much has been debated about the impact of a recession on the dollar but based on past evidence it is not clear that it weakens when the economy is in recession,” he said.

However, Derek Halpenny at Bank of Tokyo Mitsubishi-UFJ said the collapse in the US housing market could have a profound effect effect on US household wealth and consumer spending.

“The Fed needs to act aggressively again this evening and at some point the erosion of yield will prompt a more concerted bout of dollar weakness,” he said.

Elsewhere, the pound rose 0.2 per cent to £0.7433 against the euro.

Full article here.