(Updates prices, adds quotes, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 11 (Reuters) - The dollar posted sharp
gains on Tuesday after the Federal Reserve announced new
measures to inject liquidity into the financial system, easing
concerns about a deepening credit crisis and a U.S. recession.
The dollar surged against the yen and Swiss franc, on pace
for its largest daily gain in six and a half months and more
than three years respectively, after the Fed said it would lend
primary dealers up to $200 billion in Treasury securities and
allow them to use agency and mortgage debt as collateral.
It also rebounded from a record low against the euro
following the announcement of the liquidity measures, which
will be coordinated with other central banks.
"As the economy and currency suffer the most from the
credit crisis, the greenback probably has the most to gain from
a successful resolution of the credit market difficulties,"
said Nick Bennenbroek, head of currency strategy at Wells Fargo
in New York.
"The yen in particular would be at risk from a successful
resolution, from a combination of a stronger U.S. dollar and
improving risk appetites that would work against lower-yielding
currencies," he added.
The dollar hit a session high of 103.54 yen, well off an
eight-year low around 101.40 hit last Friday. It last traded at
103.35 yen, up 1.6 percent on the day, its best daily
performance since late August 2007.
The euro retreated from an all-time high just short of
$1.55 earlier in the session and fell as low as $1.5283 before
edging back to $1.5316 <EUR=>, down 0.1 percent from late on
Monday.
The Fed's action cooled market expectations for a sharp
interest rate cut at the U.S. central bank's March 18 policy
meeting, and that helped take some pressure off the dollar.
U.S. interest rate futures were pricing in a 64 percent
perceived chance that the Fed will cut its benchmark rate to
2.25 percent from 3 percent next week. Such a cut had been
fully priced in before the Fed's move.
DOLLAR GAINS COULD BE SHORT-LIVED
"In a nutshell, this demonstrates the Fed will use every
means at its disposal to get the economy going," said Jonathan
Lewis, founder of Samson Capital Advisors in New York.
Some market participants, however, said the dollar's gains
were probably not sustainable, especially as recent U.S.
economic data have been almost universally gloomy. Some
economists believe the United States is already in a
recession.
"In light of the increased chances of a U.S. recession,
broadening losses in equities and the strong fundamentals in
the euro zone, today's dollar rebound will be short-lived
largely against the euro and the yen," said Ashraf Laidi, chief
currency analyst at CMC Capital Markets in New York.
The dollar also rose 1.3 percent to 1.0333 Swiss francs
<CHF=>, while the euro strengthened to 158.23 yen <EURJPY=>, up
1.4 percent from late Monday.
High-yielding currencies rallied sharply against the dollar
and yen, with the New Zealand dollar <NZD=> rising 1.6 percent
to US$0.8017, as risk appetite returned.
Earlier, European Central Bank governing board member Axel
Weber hinted that the ECB had no room to cut interest rates,
saying German inflation remained a concern.
The ECB has held rates at 4 percent throughout the credit
crisis that erupted last summer, stressing inflation risks.
Also on Tuesday, U.S. Treasury Secretary Henry Paulson said
long-term U.S. economic fundamentals remained strong.
(Additional reporting by Steven C. Johnson; Editing by James
Dalgleish)
