Forex Update: Market Raises Bets for Fed Rate Cut

[DailyFx]

The market is speculating on a U.S. rate cut at tomorrow's policy meeting. Talk of out of Asian cited the potential for a 50 bp emergency cut to ensure the market reacted orderly to the weekend developments with Lehman Brothers, Merill Lynch and AIG. Although, the forecast is for a steady hand and rhetoric from U.S. policy makers suggested some reluctance to move the Fed funds rate below 2%. Nevertheless, the weekend events have raised the significance of tomorrow's meeting, which will leave the market on tenterhooks. U.S. Treasury yields moved to their lowest levels in several months, while the dollar has recovered a large part of its overnight losses, largely due to carry trade unwinding, which benefited the dollar by default rather than direct safe haven flows.