The Dollar fell to a one-month low versus the Euro on Wednesday after the Federal Reserve cut its 2008 growth forecast and warned of higher unemployment, reducing prospects of an interest rate hike later this year. Although minutes of the Fed's April 29-30 policy meeting highlighted worries over inflation and signaled more interest rate cuts were unlikely, it was insufficient to halt the Dollar's slide and it also touched a one-week low versus the Yen.
EurUsd surged as high as 1.5798, getting close to 1.6020 record peak above touched last month. It last traded at 1.5781 up 0.84%. UsdJpy dropped to a one-week low of 102.96, before recovering to 103.05, still down 0.59%. UsdChf dived 1.08% to 1.0257. UsdCad fell 0.83% to 0.9836, boosted by high oil prices and a gain in April Canadian consumer prices.
The slide in the Dollar came as stocks tumbled on the combination of record oil prices and the Fed lowering its 2008 growth projections to a meager 0.3% to 1.2% from its estimate of 1.3% to 2% made three months ago. The central bank also warned it expected unemployment to rise significantly. Some analysts said the minutes of the Federal Reserve's policy-setting Federal Open Market Committee suggested the US central bank could still lower rates further this year.
Short-term interest rate futures, which track market expectations for Fed policy, showed an 88% chance that the central bank will keep benchmark lending rates unchanged at 2% after aggressively cutting them by 325bp since mid-September. Prospects for a rate hike by year-end were around 80%, from near 100 percent on Tuesday.
In strong contrast, a surprise improvement in German business sentiment bolstered the case for higher euro zone interest rates, adding to the bullish tone surrounding the Euro. The ECB has held interest rates at 4% since last June, and expectations of slower euro zone economic growth in recent weeks had led investors to start pricing in a near-term rate cut. But the recent string of strong data from Germany, the euro zone's largest economy, has called that outlook into question.