(Updates prices, adds quotes, changes byline, dateline;
previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 19 (Reuters) - The dollar retreated on
Wednesday, surrendering gains made after a
smaller-than-expected U.S. rate cut, while the yen rallied amid
persistent worries about the health of the global financial
sector.
The Federal Reserve slashed its fed funds target rate on
Tuesday by 75 basis points to 2.25 percent, sparking a relief
rally in equities, a tightening in a broad range of spreads,
and triggering a rebound in the dollar.
However, the rise in risk appetite was fleeting, with
investors selling equities and buying the low-yielding yen and
safe-haven Swiss franc on Wednesday.
Investors remained concerned about problems in the banking
sector despite taking some brief comfort from
stronger-than-expected earnings reported by Lehman Brothers
<LEH.N> and Goldman Sachs <GS.N> on Tuesday and Morgan Stanley
<MS.N> on Wednesday.
"The markets are in a period of extreme nervousness, and
the yen and Swiss franc will trade entirely as risk proxies,"
said Matt Kassel, director of foreign exchange at ING Capital
Markets in New York.
"For the dollar, the path is still for lower rates. It's
going to be tough for the euro to stay offered unless the
European Central Bank joins the party and starts cutting
rates," he added.
In early New York trading, the euro was up 0.4 percent at
$1.5690, more than 2 cents below Monday's record peak of
$1.5904 <EUR=>.
The dollar was down 0.6 percent against the yen at 99.39
yen <JPY=>, after trimming losses following the Morgan Stanley
results. It hit a 13-year trough of 95.71 yen on Monday.
The dollar was also down 0.6 percent against the Swiss
franc at 0.9960 francs <CHF=>.
STILL A BLEAK DOLLAR OUTLOOK
Analysts say the outlook for the dollar remains bleak with
lower interest rates set to further cut the currency's yield
appeal.
In its statement on Tuesday, the Fed indicated it could cut
rates again, even though two voting members dissented against
the depth of the latest move. Futures markets attached a 94
percent probability of a 50 basis point cut to 1.75 percent
<FEDWATCH>.
Tuesday's rate cut is the latest in a series of
extraordinary measures undertaken by the Fed to prevent the
credit crisis from escalating.
On Sunday the central bank took the emergency step of
cutting its discount rate by a quarter point and opened up
discount window lending to major investment banks, a tool not
used since the Great Depression.
It has also announced a range of operations in recent weeks
designed to pump potentially hundreds of billions of dollars
into the fragile banking system.
However, analysts remained skeptical.
"While markets have clearly taken some comfort from the
last set of actions, we fear that the improvement in sentiment
may be short-lived," said CitiFX in a research note.
"A severe recession in the U.S. is clearly underway and
data are likely to continue to come in thick and fast,
providing evidence to that effect."
Sterling, meanwhile, fell as minutes from the Bank of
England's Monetary Policy Committee showed two of nine
policymakers favored a rate cut this month, which added to
speculation that UK rates are heading lower soon.
The pound fell as low as $1.9951 <GBP=> before trading back
up at $1.9987. The euro rose as high as 78.83 pence, close to
historic peaks and more than 7 percent higher this year
<EURGBP=>. It last traded at 78.56 pence, up 0.9 percent.
(Additional reporting by Simon Falush in London)
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Tom Hals)
