Dollar hits two month low against euro

December 16, 2008

, TOKYO, December 16 – The dollar fell to a fresh two-month low against the euro in Asia on Tuesday as traders bet the US Federal Reserve would cut interest rates again this week.

The euro rose to as high as 1.3738 dollars, up from 1.3695 in New York late Monday. The European currency slipped to 124.00 yen from 124.14.

The dollar fell to 90.35 yen from 90.63, edging back down towards last week\’s 13-year low of 88.40.

Traders were turning their focus to the Fed\’s two-day policy meeting through Tuesday, when the central bank is expected to trim its key lending rate from the current level of 1.0 percent, following a raft of gloomy economic data.

"I think they will go for a cut of at least 0.5 percentage points," said Saburo Matsumoto, chief forex strategist at Sumitomo Trust and Banking.

Matsumoto said it would be possible for the US central bank to slash rates by as much as 0.75 percentage points to 0.25 percent, which would be even lower than Japan\’s rock-bottom official borrowing costs of 0.3 percent.

"The market has already factored a cut in," he said, while arguing it was questionable what impact another rate cut would have on the economy.

Market sentiment is improving for the euro as investors expect the gap between European and US interest rates to widen, he said.

The European Central Bank\’s benchmark rate currently stands at 2.50 percent following three successive cuts since early October and most analysts have forecast another reduction in mid-January.

But ECB board member Axel Weber issued a warning to the financial markets last week not to expect more rapid cuts.

"Sentiment toward the dollar is just bad," said Satoshi Okagawa, head of a foreign exchange spot trading group at Sumitomo Mitsui Banking Corp.

"If the Fed delivers a 75-basis-point reduction, the dollar will be sold," he told Dow Jones Newswires.

Falling interest rates tend to hamper currencies because they make them a less attractive investment in terms of yields — but if they are judged to be supportive of the underlying economy, they can have a positive impact.

The dollar fell against Asian currencies, dropping to 33.07 Taiwan dollars from 33.20 on Monday, to 1.4738 Singapore dollars from 1.4764 and to 1,348 South Korean won from 1,352.

The greenback dropped to 47.22 Philippine pesos from 47.78, to 34.80 Thai baht from 34.91, and to 11,000 Indonesian rupiah from 11,150.

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