(Recasts, updates prices, changes byline, dateline previous
LONDON)
By Lucia Mutikani
NEW YORK, April 9 (Reuters) - The dollar fell against the
euro and the yen on Wednesday on views the Federal Reserve
could cut interest rates by a substantial 50 basis points this
month amid worries of a possibly severe U.S. economic
downturn.
This is in sharp contrast to expectations for further
inflation-busting talk from the European Central Bank when it
meets to decide on euro zone interest rates on Thursday.
Minutes of the March 18 Federal Open Market Committee
(FOMC) meeting revealed on Tuesday that members believed a
prolonged and severe economic downturn could not be ruled out,
citing tighter credit conditions and the housing sector slump.
"The dollar is taking a softer tone following a
reassessment of the odds of a 50 basis points interest rate
cut. (But) we are chopping around yesterday's trading range,"
said Marc Chandler, senior currency strategist at Brown
Brothers Harriman in New York.
In New York's morning session, the euro traded at $1.5728
<EUR>, up 0.2 percent from Tuesday. The single currency touched
a session high of $1.5743 in overnight trade.
The dollar fell 0.2 percent to 102.43 yen <JPY=>, reversing
earlier gains that took it near a one-month high.
Interest rate futures, which measure market sentiment
toward Fed monetary policy, are pricing in a roughly 44 percent
chance that the federal funds rate would be cut by another half
percentage point at the April 29-30 meeting.
Since mid-September, the Fed has lowered its benchmark
overnight lending rate by 3 percentage points to 2.25 percent,
erasing the dollar's yield advantage over the euro. The ECB has
kept its refinancing rate at 4 percent.
ROBUST EURO ZONE ECONOMY
Despite data earlier confirming that euro zone economic
growth had slowed in the last quarter of 2007, investors were
still contrasting a relatively robust euro zone economy with an
ailing United States in the grip of a major slowdown.
"When the FOMC minutes came out, they were a lot more
dovish than some people would have expected," UBS currency
strategist Geoffrey Yu said from Zurich.
"The market is not too convinced on the euro zone but you
are being forced to choose between the lesser of two evils
right now. People are still preferring to chase the euro higher
rather than the dollar."
The ECB is expected to keep rates unchanged after its
policy meeting, with analysts' attention focused more on the
news conference following it.
The euro hit a record high of 80 pence <EURGBP=> early in
the European session before pulling back to 79.82 pence, up 0.1
percent on the day.
This came as UK consumer morale fell and an IMF downgrade
to growth stoked debate on how aggressively the Bank of England
might cut rates after its policy meeting on Thursday.
Investors were also focusing on an upcoming meeting of G7
finance officials in Washington starting on Friday to see
whether delegates will show a united front on efforts to quell
ongoing problems in credit markets.
The International Monetary Fund said on Tuesday that
turmoil in credit markets could spread with losses possibly
approaching $1 trillion.
The Bank of Japan held rates at 0.5 percent on Wednesday
and lowered its economic outlook, while Governor Masaaki
Shirakawa said that nations should take steps to deal with the
financial market turmoil that best suit their respective
economies.
Currency markets also digested reports that Citigroup Inc
<C.N> was close to a sale of leveraged loans and bonds to a
group of private equity firms.
Despite some recent signs of stabilisation, concerns about
the fallout from the credit market turmoil were likely to
linger ahead of quarterly earnings announcements by U.S. banks
later this month, traders said. []
(Additional reporting by Veronica Brown in London; Editing
by Chizu Nomiyama)
