The US Dollar slipped on Tuesday as a sharp drop in US stocks added to concerns about an economic recession and raised prospects of a deeper Federal Reserve interest rate cut this month. Chances of a 50bp reduction in US interest rates to 3.75% at the Federal Reserve's Jan. 30 meeting after the largest US home mortgage lender, Countrywide Financial Corp saw its stock slump 27% percent, though the company denied it was facing bankruptcy.
Investors also got further reminders of the troubles in the US housing market from data showing pending sales of existing homes fell 2.6% percent in November. Boston Federal Reserve President Eric Rosengren said on Tuesday the US housing market was headed for its worst performance in 50 years and that the drop in home prices could accelerate this year if the economy weakened.
Federal funds futures contracts are pricing in a roughly 74% chance of a 50bp reduction in the Fed's benchmark overnight lending rate at month end, while a 25bp cut has been fully priced in. A steeper cut by the Fed would erode the Dollar's yield advantage over the Euro, with the European Central Bank expected to leave rates unchanged on Thursday and stick to its hawkish inflation outlook. But some analysts said that growing inflationary pressures would prevent the Fed from acting aggressively this month.
The Yen slipped during a volatile session as the price of Gold bullion surged to a new record high at 881.10 yesterday and 891.40 today, and crude oil prices recovered from a three day fall, encouraging investors to borrow in the low yielding Japanese currency to buy the two commodities. Those trades, inspired by commodity markets, pushed the Dollar lower against the Australian currency, which raced to a session high of 0.8840 before ending up 0.88% at 0.8794.