Dollar hammered on financial fears

By William L. Watts, MarketWatch

Last update: 4:47 a.m. EDT March 17, 2008

LONDON (MarketWatch) - The Bear Stearns fire sale and the Federal Reserve's emergency decision to cut its discount rate sent the dollar to plunging to historic lows against major counterparts on Monday.

In an extraordinary move, the Federal Reserve Sunday night announced it had cut its discount rate by a quarter percentage point to 3.25% and offered to lend money to an unprecedented list of firms. See full story.

The dollar hit a new 12-year low against the Japanese yen at 95.75 yen overnight and remained 1.7% lower at 97.25 yen.

The euro soared to yet another all-time high of $1.5903, against the dollar and remains 0.7% higher on the day at $1.5776. The dollar tumbled below parity with the Swiss franc, changing hands at 0.9827 francs after hitting a low 0.9631.

The Fed acted as J.P. Morgan Chase wrapped up a deal to buy Bear Stearns Cos. for $2 a share, or around $236 million, with the Fed agreeing to provide as much as $30 billion in financing to back up illiquid Bear assets, including mortgage securities the company hasn't been able to offload. See full story.

The Fed's rate-setting Federal Open Market Committee is set to meet Tuesday, where it's widely expected to announce a cut in its key lending rate, the Fed funds rate, by as much as a full percentage point to 2%. Another cut in the discount rate is also seen as a possibility.

The scope and speed of the Fed action provided little support for the dollar, which ticked higher in the immediate aftermath of the decision before plunging to new lows.

European shares plunged on the open, with banks leading major indexes lower. Major benchmarks tumbled across Asia overnight, with the Nikkei 225 Average ending 3.7% lower at 11,787.51 to finish below the 12,000-point level for the first time since August 2005. See Asia Markets. See Europe markets.

Treasury prices surged and bond yields tumbled as investors fled other assets, pushing down the yield on the benchmark two-year Treasury note by around 18 basis points to 1.31%. Bond yields move inversely to prices.

"It is highly probable that the market is assuming that something is very wrong when the Fed feels that it is necessary to cut the discount rate just one day ahead of a scheduled FOMC meeting," wrote economists at Jyske Bank.

Analysts at Danske Bank said the measures are a "cause for concern as the probability of a full credit crunch with severe damage on the economy is rising rapidly, in our view."

The British pound, meanwhile, failed to match gains versus the dollar, instead losing 0.2% against the greenback to $2.0149. The euro was up 0.9% against sterling at 0.7834 pounds.

Analysts said renewed ideas the Bank of England will be forced to follow through with rate cuts have left the pound under pressure.

"Consensus here is pointing towards the fact that the Bank of England will also be obliged to cut its rates in the coming months to stimulate demand, so expect tomorrow's U.K, CPI data to be closely watched as well for any indication as to where the yield curve may lie for sterling in the months ahead," said James Hughes, foreign-exchange analyst at CMC Markets.