Forex - Dollar weakens in Asian afternoon trade on doubts over Fed's bank boost

Wed, Mar 12 2008, 05:56 GMT
http://www.afxnews.com

HONG KONG (Thomson Financial) - The dollar weakened against the euro and the yen in afternoon Asian trading on Wednesday as investors remained wary that the Federal Reserve's plan to pump 200 billion dollars into financial markets will resolve the credit crisis caused by rising unpaid home mortgages.

"It will not solve everything. The subprime mortgage crisis will continue and there will be some more pain that will come into the financial market," said David Mann, currency strategist at Standard Chartered Bank. "The pressure on the dollar to weaken will continue."

The Fed, acting in concert with the central banks of the eurozone area, Canada and Switzerland, will lend to banks and will accept debt, including mortgage-backed securities, as collaterals.

At 1.00 pm (0500 GMT), the dollar fell to 102.83 yen from 103.03 in Tokyo this morning. The euro was up at 1.5386 dollars from 1.5353.

"While this arrangement may ease fears about the credit crisis for now, the market will remain hostage to talk of the credit crunch and until private financial institutions complete their write-offs of bad debt, which will take some time," said Osamu Takashima, chief analyst at Bank of Tokyo Mitsubishi UFJ.

The Fed also agreed to increase its currency swap arrangements, forged in December, with the European Central Bank (ECB) and Swiss National Bank (SNB).

In turn, the ECB and SNB will lend dollars to boost supply of the greenback.

The Bank of England and Bank of Canada also announced plans to extend credit facilities.

The dollar reached as high as 103.52 yen against the Japanese currency and 1.5332 dollars against the euro in early Tokyo trading following news of the coordinated liquidity injection.

"The Fed is acutely aware that managing the fed funds rate alone is insufficient in addressing the prevailing financial market situation. The recent liquidity provision announcements are essentially a more targeted approach in an attempt to mitigate the strains in financial markets,"said Thomas Lam, treasury economist at United Overseas Bank.

This is the second time in four months that central bankers have agreed to act in concert to resolve the credit trouble. In December, policy makers also agreed to do currency swaps and open credit facilities to banks to ease the global liquidity crunch.

"The interaction between the economy and financial markets and vice-versa necessitates the Fed to be creative, nimble and decisive," said Lam.

But the greenback's woes are not yet over. The US currency will continue to remain under pressure on speculation the Fed will further cut interest rates to boost the economy.

Both Mann and Lam predict the Fed will cut rates by half a percentage point to 2.50 percent when policy makers meet on March 18.

"Overall, I am still inclined towards a 50 basis points cut in the target Fed funds rate at next week's meeting and an additional 50 basis points reduction over the next few months to 2 percent," said Lam.

Last week, the dollar fell to an all-time low of 1.5459 against the euro and to an eight-year low versus the yen at 101.43.

1 pm Hong Kong (0500 GMT)

US dollar

yen 102.83

sfr 1.0294

Euro

usd 1.5386

stg 0.7641

yen 158.21

sfr 1.5822

Sterling

usd 2.0115

yen 207.03

sfr 2.0704

Australian dollar

usd 0.9391

stg 0.4632

yen 95.93