The Dollar posted sharp gains on Tuesday after the Federal Reserve announced new measures to inject liquidity into the financial system, easing concerns about a deepening credit crisis and a US recession. The Dollar surged against the Yen and Swiss franc after the Fed said it would lend primary dealers up to $200 bio in Treasury securities and allow them to use agency and mortgage debt as collateral. It also rebounded from a record low against the Euro following the announcement of the liquidity measures, which will be coordinated with other central banks.
UsdJpy hit 103.60 high yesterday, well off an eight-year low 101.42 hit last Friday. It last traded up 1.82% at 103.28. EurUsd retreated from an all-time 1.5495 high yesterday and fell as low as 1.5283 before edging back to 1.5339, unchanged.
UsdChf rose 1.37% to 1.0327. EurJpy strengthened to 158.42 up 1.79%.
High-yielding currencies rallied sharply against the Dollar and Yen, with the NzdUsd rising 1.66% to 0.8016, as risk appetite returned.
The Fed's action cooled market expectations for a sharp interest rate cut at the US central bank's March 18 policy meeting, and that took some pressure off the Dollar. US interest rate futures were pricing in a 64% chance that the Fed will cut its benchmark rate to 2.25% from 3% next week. Such a cut had been fully priced in before the Fed's move.
Some FX market participants, however, said the Dollar's gains were probably not sustainable, especially as recent US economic data have been almost universally gloomy. Some economists believe the United States is already in a recession. Also on Tuesday, US Treasury Secretary Henry Paulson said long-term US economic fundamentals remained strong.
European Central Bank governing board member Axel Weber hinted that the ECB had no room to cut interest rates, saying German inflation remained a concern. The ECB has held rates at 4% throughout the credit crisis, stressing inflation risks.