(Adds details, updates prices)
By Lucia Mutikani
NEW YORK, Jan 22 (Reuters) - The dollar fell against major
currencies, except the yen, on Tuesday after the Federal
Reserve unexpectedly slashed its benchmark overnight lending
rate in an attempt to allay market fears of a U.S. recession.
The Fed's emergency move to cut rates by three quarters of
a percentage point was precipitated by a global equities market
rout.
The central bank's move wiped out the dollar's yield
advantage over the euro, with the federal funds rate target now
at 3.5 percent and official euro zone interest rates at 4
percent. This put the European currency on track to post its
biggest one-day gain against the dollar in two years.
The cut, which preceded next week's Federal Open Market
Committee monetary policy meeting, was not enough to prevent
U.S. stocks from falling sharply when the market reopened after
Monday's public holiday. Stocks, however, recouped some of
their opening losses. For details see [].
"Under any other Fed this would not be a surprise, but this
Fed has been reluctant to cater to market expectations," said
Mark Meadows, currency strategist at Tempus Consulting in
Washington.
"This should support the euro in the short term, however
our long-standing view is still that the U.S. economy will
rebound and help the dollar gain into the middle of this
year."
In New York afternoon trade, the euro was up 1.2 percent on
the day at $1.4613 <EUR=> after briefly racing to $1.4643. The
euro has rebounded from a one-month low against the dollar of
around $1.4366, according to Reuters data.
Tuesday's emergency step was the biggest rate change since
November 1994 when the Fed tightened policy by 75 basis points.
It was the first intermeeting cut since Sept. 17, 2001.
Analysts said the Fed's bold rate cut had not changed
market projections for the dollar's recovery versus the euro in
the second half of the year.
DOLLAR RECOVERY VERSUS EURO INTACT
"The aggressive stance by the Fed together with some
stimulus package from the government could potentially insure
that the economy bottoms around the middle of the year," said
Matthew Strauss, senior currency strategist at RBC Capital
Markets in Toronto.
"The moment we see that happening we could see a strong and
sustained rally in the U.S. dollar."
President George W. Bush has proposed a $145 billion
short-term stimulus package to minimize the impact of a U.S.
economic slowdown.
Against the Swiss franc, the dollar was down 0.9 percent at
1.0986 francs <CHF=>, while the pound rose 0.9 percent to
$1.9613 <GBP=>.
The greenback was thumped against the high-yielding
Australian and New Zealand dollars. It last traded down 0.6
percent at US$0.8675 <AUD=> and dived 2.4 percent to US$0.7640
<NZD=>.
The dollar, however, fared better against the yen, with
analysts citing repatriation flows on the back of collapsing
equity prices as well as an improvement in risk appetite after
the Fed's rate cut.
It traded up 0.7 percent at 106.79 yen <JPY=>, after
earlier touching its lowest in more than two-and-a-half years
against the Japanese currency.
But some analysts were sceptical the Fed's rate cut would
ease fears of recession and said it pointed to panic by
monetary authorities.
"Lower interest rates do little to address underlying
weakness in the U.S. housing sector and broader economy. We
would not be surprised if it fostered concerns that conditions
may actually be worse than many investors anticipated," said
strategists at Citigroup in a note.
Short-term interest rate futures were pricing in a
quarter-point rate cut at the Jan. 29-30 meeting and showed a
roughly 78 percent chance of a 50 basis points cut. The Fed has
been cutting rates since mid-September.
(Additional reporting by Nick Olivari; Editing by Chizu
Nomiyama)
