Dollar Trades Near Lowest in More Than Two Months After Fed Cut

Dec. 17 (Bloomberg) -- The dollar traded near the lowest level in more than two months versus the euro after the Federal Reserve cut the target rate to a range of zero to 0.25 percent, making the greenback the lowest-yielding currency among industrialized nations.

The dollar posted its biggest five-day drop against the euro since the 15-nation currency’s 1999 debut and traded near a 13-year low versus the yen as the central bank shifted its focus to the amount and type of debt it buys to ease the recession. European Central Bank President Jean-Claude Trichet signaled on Dec. 15 it may pause in reducing borrowing costs at its meeting in January.

“The impact on the dollar is negative,” said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, a unit of Britain’s second-biggest lender. “In a financial crisis a central bank should buy whatever it deems fit. The Fed hasn’t set any target to its quantitative easing. One risk is this will damage the central bank’s balance sheet.”

The dollar traded at $1.4045 per euro as of 8:40 a.m. in Tokyo from $1.4002 late yesterday in New York, when it reached $1.4147, the weakest level since Oct. 1. The dollar was quoted at 88.95 yen from 89.05 yen. It touched 88.53 yen on Dec. 12, the lowest level since August 1995. The euro traded at 124.88 yen from 124.71.

Nine rate cuts in the past 14 months and $1.4 trillion in emergency lending have failed to reverse the longest recession in a quarter-century. Chairman Ben S. Bernanke said in a Dec. 1 speech that the Fed will need to focus on “the second arrow in the central bank’s quiver -- the provision of liquidity.”

Debt Purchases

The Fed’s statement noted that it has already announced it will purchase agency debt and mortgage-backed securities and said the central bank is ready to expand the program. The Fed said it is weighing the potential benefits of buying longer-term Treasuries.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1.9 percent to 80.683 yesterday. It has fallen 5.6 percent over the past week.

“The kitchen-sink approach means the dollar is going to weaken,” said Todd Elmer, currency strategist at Citigroup Global Markets in New York. “It further shows the Fed’s commitment to mitigating the crisis.”

The dollar has declined 12 percent from a 2 1/2-year high of $1.2330 per euro on Oct. 28 on reduced demand for short-term funding in the greenback. It dropped 7.3 percent versus the euro over the past five days.

Falling Libor

The cost of borrowing in dollars for three months in London fell yesterday on speculation policy makers will keep pumping cash into money markets to spur bank lending. The London interbank offered rate, or Libor, that banks say they charge each other for such loans dropped 0.02 percentage point to 1.85 percent, the lowest level since September 2004, British Bankers’ Association data showed.

Yesterday’s reduction by the central bank pushed the fed funds target below the Bank of Japan’s 0.3 percent rate. Japanese policy makers struggled in the 1990s to revive growth as the combination of deflation and recessions stranded the nation in the so-called Lost Decade.

The ECB reduced its benchmark rate three times since the end of September, lowering it to 2.5 percent from 4.25 percent to contain the fallout from the global financial crisis. The Bank of England cut its key rate to 2 percent from 5 percent during the same period.

ECB Rate

“Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt on Dec. 15. Asked whether the bank will refrain from a further rate reduction next month, he said policy makers want to “concentrate at this stage on getting what we already decided to be really operational.”

The U.S. currency fell 20 percent against the yen this year, the most since 1987, about $1 trillion of credit-market losses sparked a seizure in money markets and threw the U.S. economy into a recession.

The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it sank to a post-World War II low of 79.75 yen. Central banks intervene when they buy or sell currencies to influence exchange rates.