* Euro hits 2-mo high above $1.37, with Fed rate cut seen
* Investors focus on unconventional Fed action
* U.S. government bond rally expected to continue
By Kevin Plumberg
HONG KONG, Dec 16 (Reuters) - The U.S. dollar hit a
two-month low versus the euro and Asia stocks slipped on
Tuesday, ahead of an expected 10th rate cut by the Federal
Reserve since the financial crisis began and likely dismal
results from Goldman Sachs.
The Fed is widely seen chopping its benchmark rate by at
least a half-a-percentage point to 0.5 percent later on
Tuesday. And as rates head close to zero, investors will focus
on whether the central bank elaborates on what further easing
measures it will take to push the world's largest economy out
of recession [].
Recent remarks from European central bankers reflect a
reluctance to cut their base rate quickly, contrasting with the
Fed and suggesting the interest rate advantage of the euro, or
its carry, has staying power.
"The U.S. dollar remains overvalued at current levels and
with carry still favouring the euro, investors will still have
an incentive to sell dollars which suggests that euro downside
will be limited," strategists with Calyon said in a note.
"Add in the blow out in the fiscal deficit -- over $1
trillion in the current fiscal year -- and the Fed's shift
towards quantitative easing and it's not too difficult to see
the dollar taking a weaker trajectory over 2009."
Dealers also anticipated U.S. bank Goldman <GS.N> will post
its first quarterly loss since going public in 1999, signalling
that lower lending rates between banks has not ended the tough
times for the financial sector.
Asian shares were under modest pressure, led lower by big
regional exporter stocks. Japan's Nikkei share average <>
fell 0.7 percent, while South Korea's benchmark KOSPI index
<> dipped 0.2 percent in light trade.
The euro edged up 0.2 percent to $1.3715 <EUR=>, having
touched a two-month high at about $1.3725. The dollar has had a
sharp turn lower in December and analysts say this is because
the capital U.S. investors took back home in the last several
months has begun to slowly flow overseas again.
The dollar dipped 0.1 percent to 90.53 yen <JPY=> but
stayed above a 13-year low of 88.10 yen hit on Friday.
THE BOND APPEAL
Severely weak economic data in both Asia and the United
States kept upward pressure on government bond prices and fears
high that deflation was descending over the global economy.
As a difficult year ends, global investors have sought
refuge in short-term U.S. Treasury bills, maturities of 1-year
or less, loaning to the government for almost nothing or in
some cases paying to buy debt.
The yield on the 1-month bill <US1MT=RR>, which moves in
the opposite direction of the price, briefly slipped below zero
overnight, and the 3-month yield is at a mere 6 basis points.
The 30-year bond yield <US30YT=RR> edged up to 2.97 percent
after dropping to a record low on Monday. The yield on the
10-year U.S. Treasury note was steady at 2.51 percent
<US10YT=RR>.
Yields were expected to head even lower after the Fed
meeting, especially if an openness to employ unconventional
measures, such as directly buying government bonds or
government sponsored agency debt, is expressed.
"This would prompt further support for U.S. Treasuries,
alongside the ongoing dismal economic sentiment and fall in
inflationary pressures, keeping yields at depressed levels and
helping the market to absorb the hefty supply pipeline,"
Standard Chartered fixed income strategists said in a note.
Elsewhere, the MSCI index of Asia-Pacific stocks outside
Japan <.MIAPJ0000PUS> was down 0.5 percent but was still up
about 7 percent in December. The index was trying to post its
first monthly rise since April.
Hong Kong's Hang Seng index <> was down 0.5 percent,
weighed by a 3.4 percent drop in offshore oil explorer CNOOC
<0883.HK>. HSBC stock <0005.HK> was mostly steady despite
disclosing exposure of around $1 billion to the alleged fraud
of investor Bernard Madoff.
Foreign investors for the last several weeks have been
cautiously loading their portfolios back up with Asian stocks,
particularly companies with relatively low valuations and
little debt on their balance sheets.
U.S. light crude for January delivery <CLc1> was steady
just below $45 a barrel, ahead of what is expected to be the
largest ever supply cut by OPEC at a meeting on Wednesday.
[]
Oil hit a four-year low of $40.50 on Dec. 5, down more than
$100 since hitting a record high in July, as a steep global
economic slowdown kills energy demand.
(Editing by Dhara Ranasinghe)
