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Dollar near lows before Fed rate-meeting

NEW YORK - The dollar traded near record lows against the euro on Tuesday on expectations of a hefty Federal Reserve rate cut that will make the U.S. currency the second lowest yielder among the G10 economies.

Markets are pricing in a cut of at least 100 basis points to the Fed’s benchmark lending rate from the current 3 percent and are giving a 1-in-5 chance of an even bigger 125 basis points. The Federal Reserve’s policy-setting panel, which meets on Tuesday, is expected to issue a decision around 2:15 p.m. (1815 GMT).

Expectations of rate cuts have deepened after JPMorgan’s JPM.N purchase of stricken rival Bear Stearns BSC.N for a rock-bottom $2 a share and the Fed’s emergency step of cutting its discount rate by 25 basis points on Sunday.

On Monday, the dollar tumbled to record lows versus the euro, Swiss franc and a basket of major currencies, and fell further below the psychological 100 yen mark.

It remained under pressure on Tuesday, although it rebounded against the yen after stronger than expected results from Goldman Sachs GS.N and Lehman Brothers LEH.N eased some investors’ concerns about the health of the U.S. financial sector.

“The good results by Lehman and Goldman are helping ease some of the pressure on equities and on the dollar, in particular against the yen,” said Mark Meadows, a market strategist at Tempus Consulting in Washington. “But the rate decision later today is still weighing on the greenback against most other currencies.”

Meadows said he expects the central bank to cut the benchmark rate by 75 basis points.

The euro was up 0.5 percent at $1.5802, moving back towards Monday’s record peak of $1.5904 EUR. The dollar was down 0.3 percent against a basket of six major currencies .DXY at 71.251.

The Canadian dollar, meanwhile, rose to session highs versus the greenback as above-forecast February core inflation data was seen limiting the scope for future rate cuts CAD.

The dollar was up 0.4 percent on the day versus the low-yielding yen but, at 97.81 yen, stayed well under the 100 mark breached last week JPY. It also remained below parity at 0.9873 Swiss francs CHF.

“Markets have stabilized but that’s not changing the fundamental situation in the U.S,” said Geoffrey Yu, FX strategist at UBS in Zurich.

“There is speculation the Fed could cut rates by 100 basis points. That’s going to put the U.S. as the second lowest yielding currency in the G10, below even the Swiss franc. We might be entering the stage when people will be looking at the dollar as a funding currency,” he added.

Intervention eyed

The global credit squeeze continued to be reflected in short-term money markets, with overnight U.S. dollar deposit rates rising as high as 3.85 percent on Tuesday, having moved above 4 percent on Monday USDOND

The dollar’s sharp sell-off on Monday led traders to fret about the possibility of joint dollar-buying intervention by U.S., Japanese and European authorities.

Japan’s top financial diplomat, Naoyuki Shinohara, said he was told by Prime Minister Yasuo Fukuda to keep in close contact with other Group of Seven members on developments in global financial markets.

European Central Bank officials have recently expressed concern about “excessive” moves in currencies, but analysts say the ECB may be willing to accept the strong euro to help rein in inflation.

The ECB’s main task is to keep prices stable and avoid second round inflation effects, ECB board member Lorenzo Bini Smaghi told a Brazilian newspaper, adding that exports have held up well in recent years despite the rise in the euro.