Dollar extends decline a day after Fed rate cut

NEW YORK — The dollar sank to a fresh 2-month low against the euro and a 13-year low versus the yen on Wednesday, a day after the Federal Reserve cut a key lending rate target to historic lows.

The 15-nation euro surged to $1.4377 in New York midday trading, up from $1.3976 late Tuesday in New York. The euro earlier peaked at $1.4437, its highest point since September — up around 3 percent at that point, the euro's biggest one-day move up since the it started trading in 1999, said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.

The dollar was trading at 87.90 Japanese yen in midday dealings in New York, down from 89.35 yen late Tuesday. It traded as low as 87.11 yen earlier Wednesday, its weakest level since July 1995.

On Tuesday, the Federal Reserve slashed its federal funds rate target to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest rate target in a half-century, and said it would take other unprecedented moves in an effort to battle a severe financial crisis.

The Fed has now committed to increasing the money supply by expanding lending and injecting liquidity in efforts to jump-start lending to consumers and businesses. The Fed's balance sheet currently rings up at $2.2 trillion from $900 billion in September.

"In Fed-speak, this was about as maverick a statement as we have ever seen from the Fed. It suggests, particularly given the unanimous vote, that the Fed is using all available means to head off deflationary risks and stimulate growth," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp. in New York. "It is negative for the dollar."

Lower interest rates can weigh on currencies as investors seek higher returns elsewhere, and the U.S. now has the lowest-yielding currency of the major world economies. The Bank of Japan, which concludes a two-day meeting on Friday, has the second-lowest rate at 0.3 percent. Analysts predict the BOJ will shave rates by at least half as its economy recedes and its exports struggle. A weaker currency could help its major exports, such as electronics and cars, be more competitive and boost sales.

Honda Motor Co., for example, Japan's No. 2 automaker, says it loses about 18 billion yen ($200 million) in operating profit for every yen the dollar drops.

Meanwhile, the dollar edged higher against the beleaugered British pound.

The pound slipped to $1.5421 from $1.5469 late Tuesday, even as it hit its eighth record low against the euro in as many trading sessions at 1.0715 euro.

Britain's economic contraction and banking crisis have helped push joblessness to a nine-year high of 1.86 million, or 6 percent, in the August-October period, the Office of National Statistics said Wednesday. The weakening pound reflects its troubled economy, and the Bank of England, which on Wednesday released minutes from its Dec. 3-4 meeting, said it decided against cutting rates by more than 1 percentage point due to concern over a faltering pound. The British rate stands at a 57-year low of 2 percent.

In other economic news, the Commerce Department said Wednesday that the current account trade deficit, the amount the U.S. is borrowing from foreigners, fell by 3.7 percent to $174.1 billion in the third quarter. The improvement for the country is thanks to an increase in exports, due in part to a weaker buck. Analysts see the deficit narrowing further in 2009 as American consumers cut back on imported goods.

But Woolfolk noted that the financial flows deteriorated, as foreign demand for U.S. securities fell.

"The dollar had a temporary safe-haven bid (in the fall) ... but it was not sustainable at the same time foreign investors were selling U.S. long-term assets," he said. "The market has rapidly switched from being long dollars to short dollars in a matter of days."

In other New York trading, the dollar fell to 1.2049 Canadian dollars from 1.2127 late Tuesday, and sank to 1.0809 Swiss francs from 1.1275. Last Friday, the dollar bought 1.1767 francs.

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