(Updates prices, adds quote)
By Kevin Plumberg
NEW YORK, Jan 28 (Reuters) - The dollar dropped against
most major currencies on Monday, with dealers anticipating that
the Federal Reserve will have to cut interest rates
aggressively after a policy meeting later this week to boost
U.S. economic growth.
The Fed will announce its decision on Wednesday, about a
week after the central bank unexpectedly slashed its benchmark
interest rate by three quarters of a percent, a move that has
weighed on the dollar.
Interest rate futures reflect a roughly 90 percent chance
of a half percentage point rate cut by the Fed this week,
increasing after a soft reading of U.S. new home sales in
December stoked fears of a coming recession and pushed down the
dollar.
Such an interest rate cut by the Fed would bring its
benchmark lending rate to 3 percent, or 100 basis points below
the euro zone's key interest rate, and further diminish the
dollar's appeal to investors.
"With the FOMC decision looming and the U.S. at an interest
rate disadvantage, the dollar is having trouble," said Jay
Meisler, principal of Global-view.com, an online forum for
dealers and investors.
"The dollar seems more on the defensive in general ahead of
the FOMC, but I think a 25 basis points rate cut may be the
best possible outcome for markets because it keeps the stimulus
going without a sense of panic."
The euro rose 0.8 percent to $1.4790 <EUR=>, rising for the
fourth session out of the last five. Against the Swiss franc,
the dollar was down 0.8 percent to 1.0885 francs <CHF=>.
The dollar was relatively unchanged at 106.76 yen <JPY=>.
The euro rose 0.8 percent to 157.92 yen <EURJPY=>.
DOLLAR BECOMING A FUNDER
Short-term U.S. interest rates are already among the lowest
in the developed world, encouraging investors to borrow in
dollars and buy another currency to profit on the difference in
yields, which would put pressure on the dollar.
"With the market pricing in a strong chance that the
Federal Reserve follows up last week's nearly unprecedented 75
basis point inter-meeting rate cut with another 50 basis points
on Wednesday ... we argue the dollar has already become a
financing currency, joining the ranks of the yen and Swiss
franc," strategists at Brown Brothers Harriman in New York said
in a note.
Against the Canadian dollar, the U.S. dollar slipped 0.4
percent to C$1.0025 <CAD=>. The U.S. dollar dropped 0.8 percent
to 6.4100 Swedish crowns <SEK=>.
In addition to the Fed policy meeting, investors will have
to navigate a calendar chock-full of U.S. economic data,
including gross domestic product for the fourth quarter on
Wednesday and the non-farm payrolls report on Friday.
A report on December U.S. new home sales earlier on Monday
came in lower than expected, adding another weight on the
dollar's shoulders.
"The housing data is not good. There's no other way to look
at it," said Tu Packard, senior economist with Moody's
Economy.com in West Chester, Pennsylvania. "The market is
expecting more rate cuts, so there will be downward pressure on
the dollar."
Events later in the day feature results from corporate
heavyweights including American Express <AXP.N>, as well as
speeches by a few European Central Bank officials and President
George W. Bush's State of the Union address.
Bush and congressional leaders have been trying to thrash
out a $150 billion stimulus package to help to limit the
economy's downturn this year from a reeling housing market.
(Additional reporting by Steven C. Johnson, Editing by Chizu
Nomiyama)
