The US dollar fell sharply against the euro and the British Pound through the day’s currency trading, as a surprise US Federal Reserve 75 basis point interest rate cut doomed the dollar to devaluation against major forex counterparts. A 500+ point tumble in Dow Jones Industrial Average futures forced a sizeable US dollar advance through the overnight trading session, but the Fed’s surprise actions clearly took dollar bulls off-guard and forced a similarly forceful retracement through the New York morning. The Dow and S&P 500 have yet to recover all of their overnight losses, but it seems as though the Fed action has thus far stopped the bleeding in both key stock market indices. Such developments bode poorly for the dollar, which has recently held a strongly negative correlation to the Dow Jones and the S&P 500.
US Federal Reserve officials took forex markets by cutting their short-term Fed Funds interest rate by a whopping 0.75 percent—their first unannounced cut since 2001 and largest single-day reduction since 1984. The severity of the move undermined the US dollar and dashed hopes of a continued rebound against the euro. Indeed, the trade-weighted US Dollar Index posted its largest intraday fall in three months and showed few signs of slowing its descent. Given an official short-term interest rate target of a meager 3.50 percent, few traders may be willing to bid the greenback higher against higher-yielding counterparts. As we argue in a recent US dollar outlook report, such carry trade-linked selling pressures may be increasingly difficult to overcome if the Fed continues to cut rates. Markets currently price an approximate 100 basis points through 2008. Such moves would leave the US dollar as the second-lowest yielder among all major liquidly traded currencies.
Will Bernanke’s 75 basis point move be enough to keep the dollar down? Tell us what you think in the DailyFX Forex Forum EUR/USD Discussion.
Written by David Rodríguez, Currency Analyst for DailyFX.com,
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