FOREX-Dollar falls as Fed cut highlights low yield status

The dollar weakened against the euro and yen on Wednesday, erasing gains made after a smaller-than-expected U.S. interest rate cut the previous day, as dealers maintained their bearish view on the low-yielding currency.

The Federal Reserve lowered its federal funds target rate on Tuesday by 75 basis points to 2.25 percent -- futures markets had broadly expected a full percentage point reduction -- which fuelled a relief rally in equities, tightening of a broad range of spreads and a rebound in the dollar.

The Fed's move gave an extra boost to stocks and broad market sentiment which had already been lifted by earnings reports from Lehman Brothers (LEH.N: Quote, Profile, Research) and Goldman Sachs (GS.N: Quote, Profile, Research). These weren't as gloomy as many analysts had feared, particularly following the near collapse of Bear Stearns (BSC.N: Quote, Profile, Research).

But the dollar's rally fizzled out in Asia. It was unable to hold above 100 yen, while implied volatilities on currency options edged back up as the dollar's bounce drew in sellers who were more worried about the currency's meagre yield and U.S. economy's bleak prospects.

"The Fed (cut) was a little bit less than what people were expecting although it gave some comfort to equity markets ... but the dollar is back under pressure again and that's reflective of the uncertainty over the U.S. economic outlook and the systemic risk (in the banking system)," said Phyllis Papadavid, currency strategist at Societe Generale in London.

"The dollar is losing its status as a safe-haven currency, and to the extent that these (financial market) uncertainties persist, the yen and Swiss franc will continue to benefit. Our bias is still to be short the dollar and recommend being short the dollar," she said.

Forex - Dollar sheds post Fed gains

The dollar has shed most of yesterday's gains in the wake of Wall Street's sharp rally following the US Federal Reserve's decision to lower its benchmark interest rate by three quarters of a percentage point to 2.25 pct.

After the Fed's rate cut, which was slightly less than the market consensus for a full 100 basis point reduction, the Dow Jones index of leading US shares enjoyed its best day in five years, helping the US currency to rally too. The euro fell down towards the 1.56 usd mark while the dollar climbed back above 100 yen.

'This rally hasn't been sustained and there's already a bit of a hangover after yesterday's celebrations creeping in,' said James Hughes, analyst at CMC Markets.

'It's going to be a case of simply sitting back and seeing just how far the major crosses do unwind now and whether there is any net effect of the rate news, but so far saving that quarter percent for a later cut is looking as if it may be little more than a very brief shot in the arm,' he added.

The Fed's accompanying statement proved to be more hawkish than many had expected. It showed that the Federal Open Market Committee (FOMC) was divided, with two of the ten governors favouring 'less aggressive action.'
The Fed also indicated that it was giving increased attention to elevated inflation levels, thereby signalling that an end to the current rate cut cycle was fast approaching.

Antje Praefcke, currency strategist at Commerzbank Corporates & Markets, said the Fed's stance is unlikely to comfort markets for too long, given the ongoing uncertainty in credit and financial markets, despite good quarterly results yesterday from Goldman Sachs (NYSE:GS) and Lehman Brothers. (NYSE:LEH)

'It will take months before light is expected at the end of the write downs and revaluations tunnel and the flight into quality is likely to continue for the time being,' said Praefcke. 'Therefore, we think that the Swiss franc and the yen as well as the euro will push higher against the dollar.'
Analysts said renewed concerns about the credit crisis and the related economic damage are likely to set in again soon
Elsewhere, the pound will be in focus this morning when the Bank of England releases the minutes to the last meeting of the rate-setting Monetary Policy Committee and the statistics office releases the latest labour market report.

Bank watchers expect the Committee to have voted 8-1 to keep interest rates on hold at 5.25 pct in early March with David Blanchflower seen as odds on to have dissented and called for a cut.

If more vote for a cut, then the pound could be hit hard.

'This has the potential to weigh on sterling,' said Steve Pearson, chief currency strategist at HBOS.

Regarding the labour market report, sterling markets will be interested to see if there is a negative surprise. So far, employment levels have remained high despite signs of an economic slowdown elsewhere.

'In the case the labour market report comes in weak, the pound will immediately head south,' said Hans Redeker, global head of FX strategy at BNP Paribas.

Oil prices hit new high above 111 dollars

Oil prices soared to new highs above 111 dollars in Asian trading Monday as the US currency slumped to another fresh low against the euro.

New York's main contract, light sweet crude for April delivery, briefly traded at a new high of 111.42 dollars before easing to 111.08 dollars.

New York oil prices closed at 110.21 dollars during US trading hours on Friday, a day after hitting 111 dollars for the first time.

'The US dollar's weakness remained a supportive factor for the oil price in US dollar terms,' said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney.

Brent North Sea crude for May delivery was up 80 cents to 107 dollars. The April contract expired Friday at 107.54 dollars.

Oil prices are likely to trend higher after the euro rose to a fresh high above 1.59 dollars Monday for the first time, while the US unit dropped below 96 yen to a new 12-year low.

'We can continue to expect strong prices for oil and commodities like gold in the near term,' said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.

The record-breaking spree in recent weeks was fuelled by investors rushing into commodities including oil, which they see as a safe haven amid rising concerns over the US economy and financial turmoil from a credit squeeze.

The ailing greenback has helped drive up oil prices because crude is priced in dollars and becomes more affordable for buyers holding stronger currencies.

Investors view oil futures as a hedge against inflation and the weak dollar.

Oil prices have rocketed by 90 percent over the past year as the market was driven by tight supplies, geopolitical concerns in key producer nations and fierce demand for crude from China and India.

Prices have gained about 9 percent in value since the start of 2008, accelerating after the OPEC oil cartel held output at current levels at a meeting in early March.