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Dlr falls as banking worries overshadow Fed cut

LONDON - The dollar weakened broadly on Wednesday and the yen rallied as worries about the global financial sector snuffed out a brief boost to risk appetite inspired by the Federal Reserve’s 75 basis point rate cut.

The Fed lowered its federal funds target rate on Tuesday by 75 basis points to 2.25 percent which fuelled a relief rally in equities, a tightening in a broad range of spreads and a rebound in the dollar.

But the rise in risk appetite proved short-lived, with equities firmly moving back into the red on Wednesday, while among currencies the low-yielding yen and safe-haven Swiss franc resumed their rallies.

Investors remained concerned about the health of the banking sector despite taking some brief comfort from stronger than expected earnings reported by Lehman Brothers and Goldman Sachs

on Tuesday and Morgan Stanley on Wednesday.

“It’s swinging one way and then the other,” said Daragh Maher, senior currency strategist at Calyon.

”The market mood is locked into (the banking worries) and there are amplified moves as things are so opaque.”

By 1154 GMT the euro was up 0.5 percent at $1.5699, still two cents below Monday’s record peak of $1.5904.

The dollar was down 0.9 percent against the yen at 99.68 yen, after trimming losses following the Morgan Stanley results. It hit a 13-year trough of 95.71 yen on Monday.

The dollar was also down 0.6 percent against the safe haven Swiss franc at 0.9960 francs.

Sterling blues

Minutes from the Bank of England’s Monetary Policy Committee that showed two of nine policymakers favoured a rate cut this month added to speculation that UK rates are heading lower soon.

That, coupled with data showing an unexpected easing in wage inflation and worries about the health of Britain’s bank, helped push sterling back towards Monday’s record lows versus the euro.

“The minutes confirmed an easing psychology from the MPC...and softer than expected labour market figures reopen the case for a cut in rates as early as April which is why sterling has fallen,” said Audrey Childe-Freeman, European economist at CIBC World Markets.

The pound fell as low as $1.9951 and the euro rose to as high as 78.82 pence, close to historic peaks and more than 7 percent higher so far this year.

Meanwhile the outlook for the dollar looks bleak with lower interest rates set to further cut the currency’s yield appeal.

In its statement on Tuesday the Fed indicated it could cut rates again, even though two voting members dissented against the depth of the latest move.

A Reuters poll showed that all primary dealers surveyed after the Fed announced its rate decision expect it to lower interest rates in April. Futures markets attached a 94 percent probability of a 50 basis point cut to 1.75 percent.