Daily FX Commentatry – Finotec

The Dollar Dips on a Drastic Fed Rate Cut Speculation

 

By Sagiv Perez

Finotec Analysis Team

16 January 2008

 

 

Continuing signs of a recession in the world biggest economy renewed the selling’s on the greenback. The dollar hit a 2-½ year low against the yen and a record low versus the Swiss franc on Wednesday, hurt by fears of a U.S. recession and speculation about an early Federal Reserve interest rate cut. U.S. data on Tuesday showing that retail sales last year were at their lowest since 2002 further fuelled market rumors that the U.S. central bank was holding an emergency meeting to cut rates immediately. But a Fed spokeswoman declined to comment on the rumors.

Views on the U.S. economy were also dented after Citigroup Inc, the largest U.S. bank by assets, reported its first quarterly loss since its establishment in 1998. “It’s hard for anyone to buy the dollar at the moment as people are very pessimistic about the U.S. economy, haunted by the possibility of a recession there,” said a trader at a Japanese trust bank.

The U.S. unit struck a fresh 2-½ year trough and was trading around 106.23 yen on electronic trading platform EBS, down 0.4 percent on the day and the lowest since May 2005. The euro was up 0.3 percent to $1.4845, but off a seven-week peak of $1.4923 hit the previous day and a record high of $1.4969 struck in November. The dollar hit a record low against the Swiss franc below 1.0855 on EBS. The negative trend in the equity market around the world gave strong support for the borrowed carry trade currencies such as the yen and the Swiss franc.

U.S. interest rate futures markets were reflecting a 50-50 chance of the Fed lowering interest rates by three-quarters of a percentage point by the end of this month. The U.S. central bank usually cuts the fed funds rate by a quarter-point or a more aggressive half-point. Market players will be watching more U.S. data and bank earnings due this week that could further boost expectations for a hefty Fed rate cut.