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NewsMine economy united-states 2007-aug-dec Viewing Item | Dollar sinks as feds surprise cut rates { July 2007 } Original Source Link: (May no longer be active) http://www.bloomberg.com/apps/news?pid=20601087&sid=aKGvKX_7R4Qw&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aKGvKX_7R4Qw&refer=home
Dollar Falls Versus Euro After Unexpected Fed Discount Rate Cut By Min Zeng
Aug. 17 (Bloomberg) -- The dollar fell versus the euro and pound after the Federal Reserve reduced its discount lending rate to prevent credit market losses from slowing the economy.
The dollar weakened against 15 of 16 major currencies as a reduction in borrowing costs dims the allure of U.S. assets. The decline today trimmed the dollar's weekly advance as investors had sought safety in the currency after a global rout of credit markets. U.S. and European stocks rallied.
``The Fed has taken the first step to calm down the market and restore investors' confidence,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The dollar is getting a double-whammy. A reduction in interest rates makes it less attractive. The safe-haven flow into the dollar also flooded out.''
The dollar fell 0.6 percent to $1.3508 per euro at 10:27 a.m. in New York, from $1.3426 yesterday. The U.S. currency also decreased 0.2 percent to $1.9875 per pound. The decline today trimmed the dollar's weekly gain to 1.4 percent against the euro and 1.8 percent versus the pound.
The U.S. currency advanced to the highest in more than two months against the euro yesterday on concern losses in U.S. subprime mortgages are spreading to global credit markets and hurting growth. The U.S. currency has rebounded from a record low of $1.3852 per euro on July 24.
The Canadian currency led the advance against the U.S. dollar among the major currencies today, rising 1.4 percent.
Yen Declines
The yen fell against 14 of 16 major currencies as the Fed's move encouraged investors to resume buying riskier assets funded by loans in Japan, in a practice known as the carry trade.
The yen fell 0.6 percent to 153.84 per euro. The Japanese currency also declined 0.9 percent versus the New Zealand dollar and 0.5 percent against the Brazilian real.
The losses in the yen today cut its weekly advance to 5.6 percent versus the euro and 4.2 percent against the dollar as investors unwound carry trades over the past four days. The yen rose to a one-year high against the dollar and the strongest since November versus the euro yesterday.
``The Fed is bringing back stability in the market,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The Fed's move will also encourage people to get back to the carry trade.''
The Fed cut the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent from 6.25 percent. The central bank, in an unscheduled announcement, said it's prepared to take further actions to ``mitigate'' damage to the economy from the rout in global credit markets.
`Increased Uncertainty'
``Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,'' the central bank's Federal Open Market Committee said in a statement released in Washington. ``The downside risks have increased appreciably.''
The dollar remained lower against the euro and pound after the Reuters/University of Michigan's final preliminary index of consumer sentiment fell to 83.3 this month from 90.4 in July.
The yield premium on two-year U.S. Treasury notes over similar-maturity German bunds narrowed to 0.21 percentage point, from 0.27 percentage point yesterday. A smaller gap tends to reduce the appeal of U.S. assets relative to those in the euro region.
Last Updated: August 17, 2007 10:29 EDT
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