Weak U.K. data sends pound to all-time low against euro
SAN FRANCISCO (MarketWatch) -- The dollar extended losses against most major counterparts Wednesday, a day after the Federal Reserve cut interest rates to historic lows and expanded an easing program aimed at lifting the U.S. economy out of recession.
The dollar index which measures the U.S. unit against a trade-weighted basket of six major currencies, was at 78.584, down from 79.921 in North American trading Tuesday.
The U.S. central bank slashed its target rate for overnight loans between banks to between zero and 0.25% and said it would buy more debt and mortgage-backed securities.
"With the funds rate now below Japan's overnight rate, the dollar could supplant the yen as the new carry-trade currency," said Sal Guatieri, senior economist at BMO Capital.
"This likely means further declines for the greenback and a possible reprieve for commodities and resource-based currencies," he said.
Japan's overnight call rate is set at 0.3%, above the U.S. benchmark for the first time since 1993. However, analysts say the Bank of Japan is increasingly likely to cut rates and expand its easing tools at its next policy meeting Friday. Read more on upcoming Bank of Japan rate decision.
The dollar slipped versus the Japanese unit, falling to 87.42 yen from 88.92 yen late Tuesday. The greenback hit a fresh 13-year low earlier of 87.11 earlier Wednesday, according to FactSet Research data.
The dollar plunged after the Fed decision Tuesday and remains fragile, strategists said. Economists said pressure on the dollar stems less from the rate cuts than from the Fed's commitment to boosting its balance sheet.
In its statement announcing the decision, the rate-setting Federal Open Market Committee said the central bank would use "all available tools to promote the resumption of sustainable growth and to preserve price stability." See more on the Fed's moves.
Previously widespread fears about dollar liquidity have given way to worries about an oversupply of the U.S. currency, strategists said.
"The world is awash with greenbacks. They're coming out of the woodwork, they're growing on trees, and the markets are concerned," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
The Fed's actions are likely to further weaken the dollar in the short term, said Marco Annunziata, chief economist at UniCredit MIB. The dollar may be particularly vulnerable versus the euro, as the European Central Bank officials are signaling they may pause in January before cutting interest rates further.
"I still believe the harsh macro reality [in the euro zone] will eventually force the ECB's hand, but in the meanwhile its reluctance could push [the euro] toward $1.45 by January," he said.
The euro resumed its sharp advance to trade at $1.4404, up from $1.4097 late Tuesday. The single currency was trading below $1.400 before the Fed's announcement Tuesday.
But some analysts said the dollar's weakness shouldn't necessarily be taken as a sign that investors have lost confidence in dollar-denominated assets The 10-year Treasury note rallied as much as 1.1% Wednesday, sending its yield down to a record low 2.08%. See Bond Report.
"There is a disconnect somewhere, because if investors were really scared of holding dollars, then U.S. bond yields wouldn't be at record lows as they are now," wrote currency strategists at Brown Brothers Harriman, in a note to clients Wednesday.
Pound pounded
The euro also soared against the beleaguered British pound, to trade above 93 pence -- yet another in a series of all-time highs for the cross-rate. In recent action, the euro changed hands at 92.80 pence, a gain of 3.2%, after earlier rising as high as 93.23.
The pound was a lonely loser against the otherwise beleaguered dollar, giving up early gains to slip to $1.5509, down from $1.5590.
Grim U.K. data didn't help sterling. The number of Britons claiming jobless benefits rose by a larger-than-expected 75,700 in November, the Office for National Statistics reported. The figure was well above consensus expectations for a 45,000 rise and is the biggest monthly jump in 17 years.
Minutes of the Bank of England's Monetary Policy Committee meeting unsurprisingly revealed a 9-0 vote in favor of the Dec. 4 decision to slash the central bank's key lending rate by a full percentage point to 2%.
MPC members weighed an even bigger cut, but held off due partly because of worries such a move would put added pressure on the tumbling British pound.
Economists said the U.K.'s sliding economic prospects make further easing by the MPC probable.
Policy makers are likely to cut the key rate by a half point to an all-time low of 1.5% in January as it awaits the chance to read the BOE's February inflation report at the following month's meeting, said Michael Saunders, chief European economist at Citigroup.
"Unless financial conditions improve sharply for the February meeting, further easing -- and perhaps unconventional measures -- will be on the agenda at that stage," he said in a research note.
