By Rika Otsuka
TOKYO, March 12 (Reuters) - The dollar slipped on Wednesday
after rebounding from record lows against the euro the previous
day when the Federal Reserve's new steps to boost banking system
liquidity raised hopes for a recovery in strained credit markets.
The Fed lifted short-term funding to primary dealers to $200
billion and allowed them to use a wider array of mortgage debt as
collateral, prompting a wave of stock buying and sending the
dollar sharply higher against the yen from near eight-year lows.
But the dollar gave back some gains as investors locked in
profits after the U.S. currency posted its biggest one-day rise
versus the Japanese currency since August 2007.
The Fed's announcement helped the dollar turn around against
the euro from all-time lows marked on Tuesday after data showing
an unexpected improvement in German investor morale and comments
by a European Central Bank board member expressing concern about
inflation.
"There is no doubt the Fed's liquidity measures were a strong
action," said Hideki Amikura, a forex manager at Nomura Trust and
Banking. "I think the dollar has hit a bottom against the yen for
the midterm."
The euro rose 0.3 percent from late U.S. trade on Tuesday to
$1.5373 <EUR=>. It hit a record high of $1.5496 on EBS on Tuesday
after Bundesbank President and ECB Governing Council member Axel
Weber said German inflation is a cause for concern, reducing
expectations for rate cuts by the ECB.
That came after a report late last week showing the biggest
U.S. job losses in five years reinforced expectations for further
interest rate cuts by the Fed.
U.S. interest rate futures now show traders see about a 60
percent chance that the Fed will lower rates by 75 basis points
next week, versus a 100 percent chance earlier this week.
MARKET STILL SCEPTICAL
Prospects for an emergency rate cut before the Fed's next
policy meeting on March 18 have faded following the announcement
of the new liquidity steps.
The dollar fell 0.4 percent to 102.91 <JPY=> but stayed well
above an eight-year low of 101.40 yen struck on electronic
trading platform EBS on Friday.
It fell 0.4 percent against the Swiss franc to $1.0292 <CHF=>
a day after it posted its steepest one-day rise versus the
Swissie in more than three years.
Despite the dollar's sharp rally on Tuesday, some market
participants said the U.S. currency's gains were probably not
sustainable, especially as recent U.S. economic data had worried
some investors that the United States is already in a recession.
Adding to scepticism about a further rise in the dollar are
doubts that the Fed's liquidity steps will solve the fundamental
problems that credit markets are facing.
"The Fed's measure only highlights how critical the situation
is," said a dealer at a European bank in Tokyo.
Hurt by writedowns of U.S. subprime mortgages and related
securities, banks are increasingly reluctant to extend credit to
investors such as hedge funds, triggering a cycle of margin calls
and forcing selling across markets such as those for high-quality
U.S. mortgage bonds.
The dollar has been hit by persistent sell-offs in recent
months on concerns that tightening credit conditions, sparked by
the U.S. subprime housing meltdown, will strain the flow of funds
in the broader economy.
Besides the Fed's rate decision, investors are also likely to
turn their focus to quarterly earnings announcements by some U.S.
investment banks due next week, traders said. []
(Additional reporting by Chikako Mogi and Masayuki Kitano,
Editing by Michael Watson)
