The US Dollar fell sharply on Thursday after Federal Reserve Chairman Ben Bernanke said the central bank was ready to take aggressive measures to support the US economy against the steep housing slump. The Fed stood ready to take substantive additional action if needed to support growth, but was not forecasting a recession.
That left investors betting that a 50bp reduction in the federal funds rate was nearly guaranteed at the Fed's upcoming Jan. 30 policy meeting, sending the Dollar tumbling. The fed funds rate is currently at 4.25% percent after the Fed's easing cycle began in mid-September.
Bernanke's remarks were in contrast to those of his European Central Bank counterpart, Jean-Claude Trichet. He, citing persistent inflation pressures, indicated further policy tightening was likely in the euro zone, giving additional strength to the Euro.
EurUsd was up 0.93% at 1.4800 after earlier seeing a session peak of 1.4816. Investors were unconvinced that the ECB would raise interest rates in light of slowing growth in the common monetary area, helping to curb the Euro's rise, analysts said. UsdJpy dropped to an intraday low of 109.11, before bouncing back to around 109.63, about 0.24% lower on the day.
US short-term interest rate futures are pricing in a roughly 90% chance of a 50bp reduction in the Fed's benchmark overnight lending rate to 3.75% at month end, while a 25bp cut has been fully factored in. An aggressive rate cut this month will wipe out the Dollar's yield advantage against the Euro.
The ECB kept its benchmark interest rate at 4%, with Trichet indicating the bank was maintaining a tightening bias. In the UK, meanwhile, the Bank of England left rates on hold at 5.5%, giving Sterling some support, although its gains were limited as investors continued to worry about Britain's slowing economy.
GbpUsd was up 0.21% at 1.9614, while EurGbp gained 0.73% to 0.7546. Prospects for further monetary easing in the US sparked a rally in the high-yielding Australian and New Zealand dollars. AudUsd jumped 1.29% to 0.8946, while NzdUsd vaulted 1.55% to 0.7858.