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Dollar battles back after rate cut blow

The dollar regains some ground in Asian trade after falling sharply overseas in response to the US Federal Reserve's second interest rate cut in just over a week.

business Updated: Jan 31, 2008 08:43 IST

The dollar regained some ground in Asian trade on Thursday after falling sharply overseas in response to the US Federal Reserve's second interest rate cut in just over a week, dealers said.

They said Japanese importers were buying the dollar, while the recent steadier performance by global share prices was also supporting the greenback.

The dollar rose to 106.40 yen in Tokyo morning trade from 106.24 in New York late on Wednesday, when the US central bank slashed its main interest rate by half-a-percentage point to shore up economic growth.

The euro slipped to 1.4838 dollars from 1.4861 and to 157.86 yen after 157.89.

"We are seeing many importers buying the dollar. I suspect many banking institutions are also buying the dollar," said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ. "There is also a view that stocks are bottoming out. That is also helping the dollar."

The dollar fell sharply in US trade after the Fed continued its aggressive rate-cutting drive.

The central bank had already cut its key lending rate by an historic three quarters of a percentage point in a surprise move just eight days ago.

Currency speculators typically prefer to invest in countries where interest rates are strong or expected to rise so they can reap higher returns.

The euro surged to 1.4906 dollars in the wake of the US rate cut, approaching a record high of 1.4967 dollars struck on November 23.

The Fed cut rates again shortly after a government report revealed that US economic growth slowed dramatically to a 0.6 percent annualised clip during the 2007 fourth quarter.

Many dealers are betting that the Fed will reduce interest rates even further to try to cushion the world's largest economy from a housing slump and related credit crunch.

The Federal Open Market Committee (FOMC) warned that financial markets "remain under considerable stress".

"Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets," it noted.

After the "dovish" Fed statement, markets see a 100 percent chance of a US rate cut of at least 25 basis points on March 18 and a 52 percent chance of a 50-basis-point cut, said John Noonan, a currency analyst at Thomson IFR.