(Recasts, adds comments)
By Vivianne Rodrigues
NEW YORK, March 18 (Reuters) - The dollar traded near
record lows against the euro on Tuesday amid expectations for
an aggressive Federal Reserve interest rate cut, while it
rebounded versus the yen as stocks rallied and investors'
appetite for risk revived.
Markets are pricing in a cut of at least 100 basis points
to the Fed's benchmark lending rate from the current 3 percent
as the central bank tries to revive the struggling economy. The
Federal Reserve's policy-setting panel, which meets on Tuesday,
is expected to issue a decision around 2:15 p.m. (1815 GMT).
Expectations of rate cuts deepened after JPMorgan Chase's
<JPM.N> deal to purchase stricken rival Bear Stearns <BSC.N>
for a rock-bottom $2 a share and the Fed's emergency step of
cutting its discount rate by 25 basis points on Sunday.
The greenback, which sold off on Monday, remained under
pressure on Tuesday, although it advanced against the yen as
stronger-than-expected results from Goldman Sachs <GS.N> and
Lehman Brothers <LEH.N> eased some investors' concerns about
the health of the U.S. financial sector.
Demand for the Japanese yen tends to increase as investors'
aversion to risk grows. As U.S. stocks rallied, with investors
willing to take on more risk, the dollar recouped some of its
Monday's sharp losses versus the low-yielding yen.
The dollar on Monday had tumbled to record lows versus the
euro, Swiss franc and a basket of major currencies and had
fallen further below the 100 yen mark.
"There were still fears lingering about possible liquidity
problems in banks such as Lehman Brothers. But given the bank
released better-than-expected results, in combination with
another solid report by Goldman, the dollar bounced back
against the yen," said Mark Meadows, a market strategist at
Tempus Consulting in Washington.
"But the rate decision later today is still weighing on the
greenback against most other currencies."
Meadows said he expects the central bank to cut the
benchmark rate by 75 basis points.
The euro was up 0.3 percent at $1.5768, moving toward
Monday's record peak of $1.5904 <EUR=>. The dollar was down 0.2
percent against a basket of six major currencies <.DXY> at
71.335.
The Canadian dollar, meanwhile, rose to session highs
versus the greenback as above-forecast February core inflation
data was seen limiting the scope for future rate cuts <CAD=>.
The dollar was up 0.9 percent on the day versus the
low-yielding yen but, at 98.32 yen, stayed under the 100 mark
breached last week <JPY=>. It also remained below parity at
0.9911 Swiss francs <CHF=>.
"Markets have stabilized but that's not changing the
fundamental situation in the U.S.," said Geoffrey Yu, FX
strategist at UBS in Zurich.
"There is speculation the Fed could cut rates by 100 basis
points. That's going to put the U.S. as the second
lowest-yielding currency in the G10, below even the Swiss
franc. We might be entering the stage when people will be
looking at the dollar as a funding currency," he added.
INTERVENTION EYED
The global credit squeeze continued to be reflected in
short-term money markets, with overnight U.S. dollar deposit
rates rising as high as 3.85 percent on Tuesday, having moved
above 4 percent on Monday <USDOND=>.
The dollar's sharp sell-off on Monday led traders to fret
about the possibility of joint dollar-buying intervention by
U.S., Japanese and European authorities.
Japan's top financial diplomat, Naoyuki Shinohara, said he
was told by Prime Minister Yasuo Fukuda to keep in close
contact with other Group of Seven members on developments in
global financial markets.
European Central Bank officials have recently expressed
concern about "excessive" moves in currencies, but analysts say
the ECB may be willing to accept the strong euro to help rein
in inflation.
The ECB's main task is to keep prices stable and avoid
second-round inflation effects, ECB board member Lorenzo Bini
Smaghi told a Brazilian newspaper, adding that exports have
held up well in recent years despite the rise in the euro.
(Additional reporting by Tony Vorobyova; Editing by Leslie
Adler)
