Talk of emergency rate cut hits dollar

Peter Garnham
Financial Times
Monday January 14, 2008

The dollar dropped to within touching of its record low against the euro and fell across the board on Monday as rumours of an inter-meeting cut in US interest rates swept the market.

Markets moved to fully price in a 50 basis point cut in US interest rates at its meeting on January 30 after a speech last week from Ben Bernanke, chairman of the Federal Reserve.

Mr Bernanke said the central bank stood ready to take “substantive additional action” to support growth.

“The dollar remains on the defensive after Mr Bernanke’s pledge that has markets poised for an imminent rate cut,” said Sue Trinh at RBC Capital Markets.

“The rumour mill suggests a Fed cut today ahead of the meeting on January 30.”

The dollar dropped 0.8 per cent to $1.4890 against the euro, its weakest level in seven weeks and less than a cent away from the all-time low of $1.4966 it hit against the single currency last November.

The dollar also fell 1.1 per cent to Y107.77 against the yen, dropped 0.9 per cent to SFr1.0912 against the Swiss franc.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said bearish sentiment towards the dollar was reinforced by reports that additional substantial write-offs by large US financial institutions were expected to be announced this week.

He said with capital injections by sovereign wealth funds seemingly already arranged the concern lies not in the potential collapse of one of these financial institutions but on the macro-economic consequences ahead.

“With the size of the write-downs now being reported unprecedented, there is a high risk that the Fed’s far more aggressive in its monetary easing campaign by front-loading a lot of cuts into the first half of the year,” said Mr Halpenny.

“We maintain our view that the euro will break both the record high and $1.50 over the coming weeks.”

Full article here.