The Dollar posted its largest single-day gain against the Yen in nine years on Tuesday and rallied against the euro after the Federal Reserve cut the benchmark US interest rate by a less-than-expected 75bp to 2.25%. Some investors had been betting the US central bank could cut by as much as 100bp. Lower rates typically reduce the attractiveness of Dollar-denominated securities and stem demand for the Dollars to buy them.
Analysts said while the cut was smaller than expected, there were likely more to come.
UsdJpy was up 2.75% on the day at 99.86, under the 100 level breached last week. It was the largest one-day percentage advance since February 1999. UsdChf also managed to break back above parity at 1.0052 high before turning back to 0.9996 +1.48%. EurUsd was down 0.56% at 1.5654, the largest one-day percentage loss for the Euro in six weeks. Monday's record peak for the EurUsd was 1.5904.
The Fed's action takes the federal funds rate down to 2.25%, the lowest since February 2005, and comes two days after the central bank announced the latest in a series of emergency measures to stem a fast-spreading global financial crisis. The Fed has now cut rates a full 3% since September. The Fed said in the statement accompanying the rate cut decision that recent information indicates that the outlook for economic activity has weakened further while inflation has been elevated, and some indicators of inflation expectations have risen.
Dollar FX dealers also were reacting to the strength of the US equity market, which were strong throughout the day and surged to new highs after the Fed action. The Dow Jones industrial average gained 3.61% at 12392. The Dollar pushed off some of its recent credit-related concerns on stronger-than-expected results from Goldman Sachs and Lehman Brothers early in the session.
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 control 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.