Dollar Split Against Euro, Yen

The Wall Street Journal (12 December 2007)

After Fed's Interest Rate Move Associated PressNEW YORK -- The dollar rose against the euro but fell versus the yen Tuesday after the U.S. Federal Reserve trimmed a key interest rate by a quarter of a percentage point, falling short of some traders" expectations.

The Fed cut its benchmark federal funds rate to 4.25%, marking the third reduction in three months. The central bank signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending worsen. The central bank also reduced its discount rate, the interest it charges to make direct loans to banks, by a quarter-point to 4.75%.

Currency traders had priced in a quarter-point cut to the federal funds rate, with some expectations for a half-point reduction, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. The Fed's decision left investors skeptical of the central bank's ability to get ahead of the credit crunch gripping U.S. markets, Gilmore said.

"I don't think this generates a major change in terms of the dollar," he said. "I think the Fed gets a 'C-minus' today for adequately addressing the credit crisis."

Investors disappointed by the central bank's decision sold off stocks, sending the Dow Jones industrial average plummeting almost 300 points.

Following the announcement, the dollar strengthened against the euro but dropped against the yen. The 13-nation currency fell to $1.4675 against the dollar from $1.4712 in New York late Monday. The dollar declined to 110.82 yen from 111.67 yen, as investors shied away from risky yen carry trades, which involve selling off the low-yielding yen in favor of higher-yielding dollars. The British pound dropped to $2.0356 from $2.0462.

Used to jump-start an economy, lower interest rates typically weaken a currency by cutting into investors' returns on assets denominated in it. Recently, however, currency traders with hopes for a stronger economy have also weighed rate cuts' potential to avert a recession, boosting the dollar some.

Tuesday's cut marks the Fed's third rate decrease since September amid mortgage problems in the U.S. that have tripped up borrowers and caused a credit crisis among banks -- fueling wider fears about the health of the U.S. economy.

Despite recovering some in recent weeks, the U.S. currency took a hit after the Fed's two previous cuts, with a bolder-than-expected half-point decrease in September and a quarter-point cut at its Oct. 31 meeting.

A weaker dollar is welcome news for some, including manufacturers who are eager to see American exports become more competitive. The slump has also spelled rising prices for imports and diminished spending power for American tourists overseas.

Last week, the Bank of England cut its benchmark rate to 5.5% from 5.75 percent, but the European Central Bank left its rate unchanged at 4%.

In a day otherwise light on economic data, the dollar bought 1.1319 Swiss francs, up from 1.1282 late Monday, and 1.0130 Canadian dollars, rising from 1.0073.