The dollar eased back towards record lows versus the euro on Wednesday as a pick-up in risk appetite prompted by central bank measures to boost liquidity petered out.
On Tuesday the Federal Reserve lifted short-term funding to primary dealers to $200 billion and allowed them to use a wider array of mortgage debt as collateral. Central banks in the euro zone, Britain, Canada and Switzerland also took action.
This sparked a rally in equity markets and set the dollar up for its biggest one-day percentage rise versus the yen in nearly seven months.
But on Wednesday investors were more sceptical, doubting whether the central bank measures could solve problems in the economy or the credit market, so they took profits on the dollar’s gains.
“It’s a bit of a reality check. The Fed’s action obviously is welcome but it doesn’t really fix the economy,” said Martin McMahon, FX strategist at Credit Suisse in Zurich. “In a sense, it’s the Fed and other central banks concerned about the money markets and buying time to try and work through the problems, but it doesn’t affect the fact that there are still problems.”
The dollar fell 0.3 percent against a basket of six major currencies to 73.039, edging towards a record low of 72.462 set at the end of last week .DXY.
It also eased 0.2 percent to 103.16
Although markets have trimmed their bets for Fed rate cuts on the liquidity news, they are still pricing in a 2-in-3 chance of a 75 basis points easing this month alone FEDWATCH.
This compares with expectations of less than 50 basis points of cuts from the European Central Bank over the whole of 2008 FEIZ8.
“Were the Fed to do another 75 bps next week, with the commentary so far from the ECB still hawkish, it would probably hit the dollar and send (the euro) over $1.55. We don’t think it’s topped out just yet,” said McMahon at Credit Suisse.
With the euro still up more than 5 percent since the start of the year, investors will be looking for any comments from policymakers on exchange rates.
Weber, fellow ECB Governing Council member Guy Quaden, Executive Board member Juergen Stark, President Jean-Claude Trichet and Eurogroup Chairman Jean-Claude Juncker are due to speak on Wednesday.
“After Weber’s notably hawkish comments yesterday — even by his standards — it will be interesting to see to what extent his view is shared across the ECB,” Calyon said in a research note. (Reuters)
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