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Dollar Rebounds on Central Bank Moves

AP
Tuesday, 11 Mar 2008 | 12:12 PM ET

The dollar rose sharply Tuesday after the Federal Reserve announced new measures to inject liquidity into the financial system, easing concern about a deepening credit crisis and a U.S. recession.

Dollar Bill
Dollar Bill

The dollar soared against the yen and was on pace for its biggest daily gain in three months after the Fed said it would lend primary dealers up to $200 billion in Treasury securities and allow them to use agency and mortgage debt as collateral.

It also rebounded from a record low against the euro and jumped against the Swiss franc after the Fed announced its plans, which will be coordinated with other central banks.

"Anything the Fed can do to help the credit market will help the dollar," said Ron Simpson, director of foreign exchange research at Action Economics in Tampa, Florida. "At least the Fed is being creative and working on the problems."

The dollar hit a session high of 103.52 yen, well off an eight-year low around 101.40. It traded up on the day.

The euro retreated from an all-time high just short of $1.55 and fell as low as $1.5283 before edging back to little changed on the day.

The Fed's action cooled market expectations for a sharp interest rate cut at the central bank's March 18 policy meeting, and that helped take some pressure off the dollar.

U.S. interest rate futures were pricing in a 72 percent perceived chance that the Fed will cut its benchmark rate to 2.25 percent from 3 percent next week. Such a cut had been fully priced in before the Fed's move.

"In a nutshell, this demonstrates the Fed will use every means at its disposal to get the economy going," said Jonathan Lewis, founder of Samson Capital Advisors in New York.

Earlier, European Central Bank governing board member Axel Weber hinted that the ECB had no room to cut interest rates when he said German inflation remained a concern.

The ECB has held rates at 4 percent throughout the credit crisis that erupted last summer, stressing inflation risks.

Not Out of the Woods Yet

Some market participants, however, said the dollar's gains were probably not sustainable, especially as recent U.S. economic data has been almost universally gloomy. Some economists believe the economy is already in a recession.

"The economic rationale for buying the dollar is that this encourages confidence in the U.S. financial system, but, earlier this morning, the market was selling the dollar on exactly the same logic," said Alan Ruskin, chief international strategist at RBS Greenwich Capital, in a note to clients.

Ruskin said the dollar's rally probably has more to do with the market being caught off guard by the Fed's liquidity injection and being forced to cover short dollar positions.

The dollar also rose versus the Swiss francs, while the euro strengthened against the yen .

High-yielding currencies rallied sharply against the dollar and yen, with the New Zealand dollar rising versus the dollar as investors recovered their risk appetite.

Also Tuesday, U.S. Treasury Secretary Henry Paulson said long-term U.S. economic fundamentals remained strong.

But strategists at CitiFX said in a note to clients that dollar and high-yield currency gains would be temporary.

"We are concerned that the Fed's policy moves remain altogether too reactive," they wrote. "The latest decision may alleviate liquidity tensions in the short run, but credit concerns are likely to persist and averting a drawn-out recession is becoming increasingly challenging."

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