Tue, Mar 11 2008, 05:54 GMT
http://www.afxnews.com
HONG KONG (Thomson Financial) - The US dollar weakened against the euro in afternoon Asian trade on Tuesday as investors bet the Federal Reserve will continue to lower rates in coming months to lift the economy.
"The US economy is likely to slump through the midyear and only recover towards the end of the year," said Tomoko Fujii, head of economic strategy at Bank of America. "We expect more rate cuts even after this month."
Bank of America expects the Fed to reduce its benchmark rate to 1.5 percent by June from 3.0
percent currently, Fujii said. During its regular meeting on March 18, the Federal Open Market Committee will likely slash rates by at least 50 basis points, she said.
The probability of the Fed lowering its rates before the scheduled meeting next week is low, said Fujii.
At 1.00 pm (0500 GMT), the euro was trading at 1.5366 dollars, up from 1.5344 in Tokyo this
morning. The dollar was at 101.77 yen from 101.58.
The dollar may fall further to a record 1.57 against the euro and the yen may rise to 100 against the greenback, Fujii said.
Last week the euro soared to 1.5464 versus the dollar, its highest level since the single European currency began trading in January 1999, while the yen touched an eight-year high of 101.40 against the greenback.
"The diverse views on the extent of Fed easing in the near term were also fuelling uncertainties in credit markets. The near-dated Fed funds futures contract is still stubbornly pricing for a 75 basis points move at next week's meeting. Or some probability of an inter-meeting move," said Thomas Lam, treasury economist at United Overseas Bank.
"But recent Fed announcements on liquidity provision, whispers of alternative policy tools and the upward creep in longer-term inflation expectations measures might be more consistent with a
50 basis point move next week," said Lam.
A bigger rate cut "would merely reinforce market psychology and set the precedence for more pronounced policy actions at subsequent meetings," he said.
European Central Bank chief Jean-Claude Trichet's concerns about the volatile currency market failed to arrest the pressure on the dollar to weaken.
Trichet told reporters in Switzerland Monday that the dollar's string of record lows was unsettling.
"Remarks by Trichet may not be able to halt the rising trend of the euro, but may only be capable of slowing the pace of its rise," said Ryohei Muramatsu, head of Group Treasury Asia at Commerzbank in Tokyo.
Record oil prices, slumping housing and financial sectors, rising home mortgage defaults, declining consumer spending and an increasing number of jobless citizens are making investors wary about the health of the US economy, which is feared to be already in recession.
A recession in the US may slow the global economy because Americans are the biggest buyers of appliances, computers, mobile phones and other exports from Asia and Europe.
But UOB's Lam thinks otherwise.
"While some individual indicators suggest that the US economy is in recession, a broader range of indicators imply that growth has basically stalled. Therefore, it is still unclear to me whether or not the US economy is definitively in recession or vaguely in an environment of horribly sluggish growth," said Lam.
"Essentially, the US economic backdrop appears to be in a state of indetermination at this juncture."
The Labor Department reported on Friday that the US economy unexpectedly shed 63,000 jobs in February, the most in five years. That followed news on Thursday that home foreclosures rose to a record high in the fourth quarter of 2007.
Since it began easing its monetary policy in September, the Fed has trimmed rates by a cumulative 225 basis points.
Hong Kong 1.00 pm (0500 GMT)
US dollar
yen 101.77
sfr 1.0194
Euro
usd 1.5366
stg 0.7652
yen 156.38
sfr 1.5656
Sterling
usd 2.0065
yen 204.39
sfr 2.0459
Australian dollar
usd 0.9191
stg 0.4579
yen 93.60
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