The Wall Street Journal-20080123-Euro Regains Ground on Dollar
Return to: The_Wall_Street_Journal-20080123
Euro Regains Ground on Dollar
NEW YORK -- The euro recovered ground against the dollar and yen yesterday, reversing day-earlier declines after the Federal Reserve announced a rare inter-meeting rate cut.
However, the Fed's decision to lower its benchmark lending rate by 0.75 percentage point to 3.5% didn't stop U.S. stock indexes from dropping. Consequently, safe-haven currencies, such as the yen and dollar, gained back some of their morning losses from higher-yielding rivals, such as the euro.
"[The] fact that equity markets are not rallying hard suggests that there is more work to be done before confidence is restored," said Divyang Shah, chief foreign-exchange strategist of the Commonwealth Bank in London. "The risks remain . . . but it's good to know that the [Ben] Bernanke Fed is willing to deliver more aggressive rate cuts."
Analysts were looking at two barometers of risk to gauge how effective the rate cut was and how to trade.
"We're really going to be focused on the euro versus the yen and the Dow [Jones Industrial Average]," said Andrew Busch, global foreign- exchange strategist at BMO Capital Markets in Chicago.
The euro was at $1.4620 from $1.4444 Monday, while the dollar was at 106.58 yen from 105.99. The euro was at 155.81 yen from 153.09. The United Kingdom pound was at $1.9614 from $1.9433. The dollar was quoted at 1.0967 Swiss francs from 1.1091.
However, the dollar, euro and yen were little changed compared with levels late Friday. Financial markets in the U.S. were closed Monday in observance of Martin Luther King Jr. Day.
The Fed rate cut came after a global equities frenzy Monday. Mounting concern over a U.S. recession led stocks around the world on a nose-dive. European equity markets had stabilized during yesterday's session on talk that the Fed and maybe other central banks might make inter-meeting rate cuts.
During New York trading yesterday, the euro had hit an intraday peak at $1.4645, almost three cents higher than its intraday low. It also hit a high of 156.45 yen, more than four yen higher than its low of 152.10, but it subsequently retreated.
Lower interest rates typically hurt the dollar against the currencies of countries with higher interest rates.
"The dollar has lost a tremendous amount of yield advantage" versus the euro, said Dan Katzive, foreign-exchange strategist at Credit Suisse in New York.
In addition, the slashed rate, which may be marked down further at the Fed's next rate-setting meeting, Jan. 29-30, now makes the dollar a funding currency, said Chris Turner, head of foreign-exchange strategy at ING Financial Markets in London.
That means that during periods of higher risk appetite, investors would borrow dollars to fund bets in higher-yielding currencies in a strategy called the carry trade. The yen is the typical funding currency because of its low interest rate, but the popularity of using the dollar may rise, Mr. Turner and other analysts said.
