HONG KONG (Reuters) - The U.S. dollar hit a two-month low versus the euro and Asia stocks slipped on Tuesday, ahead of an expected 10th rate cut by the Federal Reserve since the financial crisis began and likely dismal results from Goldman Sachs.
The Fed is widely seen chopping its benchmark rate by at least a half-a-percentage point to 0.5 percent later on Tuesday. And as rates head close to zero, investors will focus on whether the central bank elaborates on what further easing measures it will take to push the world's largest economy out of recession.
Recent remarks from European central bankers reflect a reluctance to cut their base rate quickly, contrasting with the Fed and suggesting the interest rate advantage of the euro, or its carry, has staying power.
"The U.S. dollar remains overvalued at current levels and with carry still favoring the euro, investors will still have an incentive to sell dollars which suggests that euro downside will be limited," strategists with Calyon said in a note.
"Add in the blow out in the fiscal deficit -- over $1 trillion in the current fiscal year -- and the Fed's shift toward quantitative easing and it's not too difficult to see the dollar taking a weaker trajectory over 2009."
Dealers also anticipated U.S. bank Goldman (GS.N: Quote, Profile, Research, Stock Buzz) will post its first quarterly loss since going public in 1999, signaling that lower lending rates between banks has not ended the tough times for the financial sector.
Asian shares were under modest pressure, led lower by big regional exporter stocks. Japan's Nikkei share average .N225 fell 0.7 percent, while South Korea's benchmark KOSPI index .KS11 dipped 0.2 percent in light trade.
The euro edged up 0.2 percent to $1.3715, having touched a two-month high at about $1.3725. The dollar has had a sharp turn lower in December and analysts say this is because the capital U.S. investors took back home in the last several months has begun to slowly flow overseas again.
The dollar dipped 0.1 percent to 90.53 yen but stayed above a 13-year low of 88.10 yen hit on Friday.
THE BOND APPEAL
Severely weak economic data in both Asia and the United States kept upward pressure on government bond prices and fears high that deflation was descending over the global economy.
As a difficult year ends, global investors have sought refuge in short-term U.S. Treasury bills, maturities of 1-year or less, loaning to the government for almost nothing or in some cases paying to buy debt.
The yield on the 1-month bill, which moves in the opposite direction of the price, briefly slipped below zero overnight, and the 3-month yield is at a mere 6 basis points.
The 30-year bond yield edged up to 2.97 percent after dropping to a record low on Monday. The yield on the 10-year U.S. Treasury note was steady at 2.51 percent.
Yields were expected to head even lower after the Fed meeting, especially if an openness to employ unconventional measures, such as directly buying government bonds or government sponsored agency debt, is expressed.
"This would prompt further support for U.S. Treasuries, alongside the ongoing dismal economic sentiment and fall in inflationary pressures, keeping yields at depressed levels and helping the market to absorb the hefty supply pipeline," Standard Chartered fixed income strategists said in a note.
Elsewhere, the MSCI index of Asia-Pacific stocks outside Japan .MIAPJ0000PUS was down 0.5 percent but was still up about 7 percent in December. The index was trying to post its first monthly rise since April.
Hong Kong's Hang Seng index .HSI was down 0.5 percent, weighed by a 3.4 percent drop in offshore oil explorer CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz). HSBC stock (0005.HK: Quote, Profile, Research, Stock Buzz) was mostly steady despite disclosing exposure of around $1 billion to the alleged fraud of investor Bernard Madoff.
Foreign investors for the last several weeks have been cautiously loading their portfolios back up with Asian stocks, particularly companies with relatively low valuations and little debt on their balance sheets.
U.S. light crude for January delivery was steady just below $45 a barrel, ahead of what is expected to be the largest ever supply cut by OPEC at a meeting on Wednesday.
Oil hit a four-year low of $40.50 on December 5, down more than $100 since hitting a record high in July, as a steep global economic slowdown kills energy demand.
