Dollar pressured by expectations of more rate cuts

[Neil D]

SAN FRANCISCO (MarketWatch) -- The dollar was down against its major counterparts Tuesday, pressured by expectations of an encore from the Federal Reserve, which earlier cut its overnight lending rate by 75 basis points to 3.50% in an emergency move after waves of panic selling in overseas markets.

The dollar index, which tracks the performance of the greenback against other major currencies, was down about 0.7% at 76.376, after earlier dropping as low as 76.251.

In a rare move between formal meetings, the central bank lowered its overnight lending rate by three quarters of a percentage point to 3.50%. The Fed also cut its discount rate by 75 basis points to 4%. See full story.

Most analysts and investors expect more easing ahead. Read The Fed.

Coming as it did just a week before the central bank's regular meeting, the move was tantamount to "a declaration of a state of emergency for the U.S. markets and the economy, and suggested that the Fed is "behind the curve in staving off the threat of recession, while hastily attempting to instill some semblance of stability in a freefalling financial market environment," wrote Ashraf Laidi, chief foreign exchange analyst at CMC Markets.

With more rate cuts likely at the Fed's meeting next week, Laidi said, rates could drop by a total of 100 basis points in eight days -- the same magnitude that some economists predicated for all of 2008.

Wall Street withers

Earlier Tuesday, U.S. Treasury Secretary Hank Paulson also tried to lift investor sentiment, saying he's moving to enact an economic stimulus plan "as soon as possible." He said he's optimistic that a plan can be carried out with Congress "long before winter turns to spring."

Paulson said his team has been monitoring the global sell-off in stocks, and called for swift, robust, broad-based and temporary fix for an immediate impact on the economy. Paulson said that looking ahead, unemployment remains low and that the "structure of our economy is sound and our long-term economic fundamentals are healthy."

But neither Paulson nor the Fed cuts prevented a sharply lower open on Wall Street, where markets were closed Monday for a holiday and needed to catch up to deep losses overseas. Major stock indexes later pared losses but remained solidly in the red. See Market Snapshot.

The euro was last up about 1.3% at $1.4613. See real-time currency prices.

"The rally in the euro was not that impressive in our view," said Adam Hewison, president of INO.com, a technical-analysis site.

Hewison added he expects euro selling to come in around the $1.4750 to $1.4800 levels this week.

The euro's reaction to the Fed's rate cut was "disappointing," wrote currency analysts at Action Economics, and showed investors' lack of confidence that the European Central Bank will ease to support the eurozone economy.

Lower rates typically weigh on a currency because they erode the returns on assets denominated in it, but sometimes they are supportive for currencies to the extent that they bolster economic growth prospects.

"The market is looking for a similar response from the ECB, but recent rhetoric suggests that the Bank will not be quick to give the market what it wants. In this respect, the euro could actually suffer on growth fears despite the sharp move in rate differentials today," Action Economics said.

BOC cuts as expected; Japan holds pat

At its regularly scheduled meeting Tuesday, the Bank of Canada cut its base rate a quarter-point to 4% as economists had expected even before the Fed's action.

"Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries. Given this, and a deeper, more prolonged decline in the U.S. residential housing sector, the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October monetary policy report," the BOC said.

Canadian interest rates "are headed lower," wrote Michael Gregory, economist at BMO Capital Markets.

"With the fed funds target rate on a fast train to 2% -- consistent with past Fed policy responses to recession -- the Bank of Canada will likely cut its policy rate to 3%," Gregory said.

The U.S. dollar was down about 0.9% to C$1.0246.

The dollar was buying 106.71 yen, off an earlier low of 105.70 yen, gaining as stocks pared losses and risk appetite returned.

Earlier Tuesday, the Bank of Japan voted unanimously to keep its benchmark interest rate on hold at 0.5%, saying the economy was weaker than it had forecast in October. That decision was widely expected. See full story