Fed in two-day meeting amid talk of coordinated rate cuts
By William L. Watts & Nick Godt, MarketWatch
LONDON (MarketWatch) -- The U.S. dollar was mixed against major counterparts on Tuesday, notching gains against a broadly weaker yen but losing ground against the recently battered euro as safe-haven flows eased.
Currency traders also positioned themselves as the Federal Reserve began its two-day meeting.
The Fed is widely expected to cut its key interest rate by half a percentage point to 1% on Wednesday. There was also unconfirmed talk of an early move in coordination with other central banks.
"Now more than ever, the Fed's decision could turnaround the currency and equity markets," Kathy Lien, currency strategist at GFT Forex, wrote in a research note.
"The recent strength of the U.S. dollar will add pressure on the Federal Reserve to make a larger interest rate cut but everyone needs to realize that the rate cut by the Fed this week will not be their last," she wrote.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, traded at 86.990, down from 87.245 in early trade, and from 87.185 in North American trade late Monday.
Equities rebound
Equity markets rebounded sharply in Asia. See full story. Europe also moved to reclaim some lost ground following Monday's rout. And on Wall Street, the Dow Jones Industrial Average gained nearly 300 points in early action. See Market Snapshot.
"The rise of more than 6% [by] Japanese equities helped to weaken the yen," wrote Marcus Hettinger, currency strategist at Credit Suisse in Zurich, in a research note.
However, the major topics driving foreign exchange action in recent days, including de-leveraging and flight-to-quality flows "are likely to continue in comings days which is why we see continued upside" for the yen, Swiss franc and U.S. dollar, he said.
The dollar rose to 95.52 yen in recent action, up from 92.57. The yen hit a 13-year high against the dollar at one point Friday and posted gains Monday despite a weekend warning from Group of Seven finance ministers and central bankers against "excessive" yen volatility. See full story.
Subsequent remarks by French Finance Minister Christine Lagarde on Monday, however, put a damper on the potential for coordinated intervention. In a television interview, Lagarde indicated there was little appetite for a coordinated move, but said the G7 would back efforts by Japan to arrest the yen's rise.
"What at first sight appeared to be a signal that the monetary authorities were prepared to take multilateral action to dampen volatility in the currency markets, now looks rather more like a signal that the Japanese will have to go it alone in attempting to stymie further yen strength," wrote currency strategists at Bank of New York Mellon. "No doubt the markets will be taking careful note."
The yen has rallied sharply in recent months, boosted by unwinding of once-popular carry trades and causing pain for Japanese exporters.
The euro rose to $1.2549 against the dollar, up from $1.2452 late Monday. The single currency notched a new two-and-half-year low against the dollar below $1.2400 in Asian trade before rebounding.
Worries about the exposure of euro-zone banks to troubled Central and Eastern European economies is likely to continue casting a cloud over the euro, Hettinger said.
"Euro sentiment was already very negative and recent developments certainly didn't change that," wrote strategists at KBC Bank in Brussels. "On the other hand, the euro had a battering and dropped already from $1.60 to below $1.24, in a span of only three months, a breathtaking pace"
The British pound rose to $1.5705 against the dollar from $1.5518 late Monday. The currency tumbled sharply last week after economic data continued to point to a potentially deep recession. The euro had traded near the $2 level as recently as August.
The Confederation of British Industry's monthly distributive trades survey on Tuesday showed sales volumes at U.K. retailers remained weak but held up better than expected in October.
Fifty percent of retailers said that sales volume in the first half of October was below the level seen in the same period last year, while 23% said it was up, for a balance of -27.
The balance was unchanged from September. The index was expected to weaken to around -35, according to a survey of economists.
Meanwhile, the Bank of England's twice-yearly financial stability report held out hope that recent moves to steady the British and world banking systems would bear fruit. But the report warned that significant threats to stability remained. See full story.
