AP
Dollar Mixed in Currency Trading
Wednesday January 23, 3:44 pm ET
Dollar Rises Against Euro and Pound, but Falls Versus Yen


NEW YORK (AP) -- The dollar gained ground against the euro and the pound but fell against the yen Wednesday, a day after the U.S. Federal Reserve's decision to slash its key interest rate.

The 15-nation euro fell to $1.4593 in late New York trading, down from $1.4612 Tuesday. It had climbed as high as $1.4684 in Wednesday's session before falling back, even though the U.S. Congressional Budget Office forecast a higher deficit.

Britain's pound sank to $1.9526 from $1.9625.

The dollar fell against the Japanese currency, however, falling to 105.75 yen from 106.48 yen. Early in the Asian session, the dollar briefly rose to 107.38 yen as regional stock markets rallied. But it reversed course when Asian stocks fell back from morning gains.

"Pessimism about global stocks remains deeply rooted in markets," said Akio Shimizu, head of foreign exchange trading at Mitsubishi UFJ Trust and Banking. "Unless clear signs of a global stock rally appear, investors won't buy back the dollar actively" versus the yen.

Dealers said the U.S. currency could fall to 105 yen if U.S. and European stock markets remain sluggish.

The yen has tended to trade inversely with equity markets. When the Dow rises, investors are more likely to borrow yen for risky "carry trades." When stocks fall or waver, the yen tends to benefit against the dollar as investors sell off high-yielding assets such as the euro or the New Zealand kiwi.

In carry trades, investors borrow currencies with low interest rates and use the funds to buy higher-yielding assets.

Confronted by a global stock sell-off generated by fears of a U.S. recession, the Fed slashed its federal funds rate Tuesday from 4.25 percent to 3.5 percent and indicated further rate cuts were likely.

The surprise reduction was the biggest one-day rate move by the U.S. central bank in more than 16 years. Lower interest rates can jump-start a country's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.

On Wednesday, European Central Bank President Jean-Claude Trichet suggested that he was sticking with his anti-inflation stance -- and would not follow the Fed in cutting rates. However, some analysts believe global market and economic troubles could still prompt the ECB to cut rates later this year.

The impact of further U.S. rate cuts may be limited by lingering concerns over earnings from the U.S. financial sector and the direction of the world's biggest economy, said Tohru Sasaki, chief foreign-exchange strategist at JPMorgan Chase Bank.

The next Fed rates meeting is scheduled for Jan. 29-30. Many investors expect the central bank to cut rates again.

In other New York trading, the dollar fell to 1.0913 Swiss francs from 1.0974 Swiss francs, but rose to 1.0300 Canadian dollars from 1.0266 Canadian dollars.