Dollar Rate Cut Likely

Posted by Rob

January 28, 2008

The Euro rallied against the US dollar on speculation that the Federal Reserve will cut the benchmark interest rate by a half percent later this week.

Last week the Fed took emergency action by cutting the interest rate from 4.25% to 3.5%, with a further 0.5% rate cut likely this week, that would take the interest rate to 3%. A total cut off 1.25% in little over a week.

Currency traders saw the dollar fall to a two week low against the Euro as an increasing number of traders looked to a strengthening Euro and further US dollar weakness.

The dollar also felt pressure from a US new-home sales report showing a drop in purchases to a 12-year low in December. “It’s certainly not an environment to buy the dollar,” said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets Inc. - Bloomberg

Data released showed a significant slow down in new home sales. A decrease of 4.7% to 604,000 per annum. This marked the worst fall since February 1995.

Other currencies performed well against the dollar by due to a heightened interest in the Fed’s announcement later this week. The Australian dollar, New Zealand dollar and Brazilian Real all performed well against the USD.

According to Camilla Sutton, co-head currency strategist at Scotia Bank in Toronto said, “The dollar is very rapidly losing its interest-rate support, whether the Fed goes 25 or 50 basis points, that trend won’t change. It’s just a matter of time before we’ll see a weaker labour market in the U.S. and falling consumption.”

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