(Recasts, updates prices, adds quotes, changes byline,
dateline, previous LONDON)
By Steven C. Johnson
NEW YORK, March 12 (Reuters) - The dollar fell broadly on
Wednesday and neared a record low against the euro as strong
euro zone economic data renewed focus on the divergent paths of
European and U.S. interest rates.
The greenback had rallied sharply the previous session
after the Federal Reserve said it would lend primary dealers
$200 billion in Treasury securities and accept a wider array of
mortgage debt as collateral to help ease tight credit markets.
But those gains fizzled out in European trade as the dollar
plunged by 1 percent versus the yen. The euro soared to $1.5491
<EUR=>, just shy of a record high, after euro zone data showed
industrial output rose by much more than expected in January.
That bolstered the view that the European Central Bank need
not rush to cut interest rates. The Fed, though, is still seen
cutting its benchmark rate at a March 18 meeting despite its
efforts on Tuesday to improve financial market liquidity.
"We're getting a reality check today," said Matthew
Strauss, senior FX strategist at RBC Capital Markets in
Toronto. "The market is realizing that the strength of recent
euro zone data suggests the ECB is right to hold rates and
focus on inflation."
Meanwhile, he said the Fed's recent move to get money
flowing in financial markets "addresses short-term liquidity
issues but doesn't address underlying credit concerns and the
U.S. housing decline, which have not gone away."
The euro last traded at $1.5475, up 0.9 percent on the day
and just below an all-time high of $1.5495. Strauss said a move
to the round number of $1.55 could spark some dollar buying but
said that was unlikely to be sustained.
The euro is up 6 percent against the dollar so far this
year and 18 percent in the last 12 months.
The dollar also fell 1 percent to 102.32 yen <JPY=>,
heading towards Friday's eight-year low around 101.40 after
rising to 103.59 on Tuesday. It fell 1.2 percent to 1.0211
Swiss francs <CHF=>.
Although markets have trimmed their bets for Fed rate cuts
on the liquidity news, they are still pricing in a 2-in-3
chance of a 75 basis points easing this month alone. For more
see <FEDWATCH>.
This compares with expectations of less than 50 basis
points of cuts from the ECB over the whole of 2008 <FEIZ8>. The
benchmark fed funds rate currently stands at 3 percent, while
the euro zone refinancing rate is set at 4 percent.
With the euro up sharply against the dollar, investors will
look for any comments from policymakers on exchange rates.
Some analysts said speculation that Middle East oil
exporters may drop their currency pegs to the dollar was also
weighing on the U.S. currency.
The dollar pegs make it harder for countries to fight
rising inflation at a time when record oil prices are bringing
massive cash inflows into their economies.
"While the most likely solution for these currency regimes
would involve a move towards a basket of currencies of which
the dollar would make up a large share, a collective
announcement of such a move would be more than a symbolic blow
to the dollar's currency reserve status," CMC Markets analyst
Ashraf Laidi said in a research note.
Also on Wednesday, Jordan said it was set to reducing the
U.S. currency's composition in its reserves. [].
China's commerce minister said his country should hold its
reserves in various currencies [], also raising
the specter of dollar selling.
(Additional reporting by Simon Falush in London; Editing by
James Dalgleish)
