US Dollar falls due to rate cut in Federal Funds

Singapore – Against major competitors, US dollar had changed on Wednesday when the dealers considered the probability of Federal Reserve cutting its funds rate in the coming term in a continued effort to reinstate calm in credit markets.
According to Senator Chris Dodd, chairman of the senate banking committee, Fed chairman Ben Bernanke had said on Tuesday that to address the credit crisis in the US financial system he was completely ready to use all the tools at his removal. After a closed-door meeting with Bernanke and Treasury Secretary Henry Paulson, Dodd stated Bernanke’s comments to the press.
The senator, who is looking for the Democratic Party’s selection for the 2008 presidential promotion, criticized the Fed for acting too gradually in tightening system for lenders, but commended the central bank’s decision on Friday to insert more liquidity into the market by lowering the discount rate by 50 basis points.
The remarks primarily fueled hope that the fed will follow its discount rate cut by minimizing quickly fed funds rate at its next meeting. But the hopes faded after Jeffrey Lacker, head of Richmond Federal Reserve, said that financial market instability was not the sufficient reason by itself for the Fed to cut rates.
Jeffrey Lacker said in his speech, that “Interest rate policy needs to be directed by the viewpoint for real expenditure and increase. Federal funds rate adjustments in response to changes in the outlook for inflation and growth should continue to endeavor to stabilize inflation expectations”.
Thomas Lam, Treasury economist at United Overseas Bank was not essentially trying to shut the door to the idea of a rate cut.
If the current disorder in the credit markets begins to blow the outlook for growth or rise, the Fed would have to move, said Lam, but “they don’t want to give the impression that they are bonding anyone out — that would support even more risk-taking.”Lam is expecting the Fed to convey at least 25 basis points to cut either at its September meeting or even in an inter-meeting move.
“The risks haven’t really worsened and there is still a chance they could embark on an emergency cut,” he said. If not, “they might cut by at least 50 basis points at the next meeting.”
Dollars last trading was at 114.59 yen compared with 114.36 yen in the early trade.
According to the Thursday’s interest rate decision by the Bank of Japan yen is expected to remain in a tight range ahead.
“No one expects it to be anything but a ‘no change’ statement,” said Ian Copsey, senior financial analyst at Global Forex Trading. “However, this is the first rate decision following the turmoil and what the market is now focusing on how the central banks are going to react.”
The euro was last trading at 1.3490 US dollars, up from 1.3457 early in the session. The European currency came under pressure after a key indicator of business confidence in Germany came in well short of market expectations on Tuesday. Adding to the downdraft, the head of one of Germany’s largest state-owned banks warned that foreign lenders were cutting off credit lines to banks in Germany, Europe’s biggest economy.The UK Times reported on Wednesday that the credit crisis was inching closer to the “heart of the British financial system”.