The dollar slipped on Wednesday after rebounding from record lows against the euro the previous day when the Federal Reserve's new steps to boost banking system liquidity raised hopes for a recovery in strained credit markets.
The Fed lifted short-term funding to primary dealers to $200 billion (Dh734 billion) and allowed them to use a wider array of mortgage debt as collateral, prompting a wave of stock buying and sending the dollar sharply higher against the yen from near eight-year lows.
But the dollar gave back some gains as investors locked in profits after the US currency posted its biggest one-day rise versus the Japanese currency since August 2007.
The Fed's announcement helped the dollar turn around against the euro from all-time lows marked on Tuesday after data showing an unexpected improvement in German investor morale and comments by a European Central Bank policy board member expressing concerns about inflation.
"There is no doubt the Fed's liquidity measures were a strong action," said Hideki Amikura, a forex manager at Nomura Trust and Banking. "I think the dollar has hit a bottom against the yen for the midterm."
The euro edged up 0.1 per cent from late US trade to $1.5352 It hit a record high of $1.5496 on EBS on Tuesday after Bundesbank President and ECB Governing Council member Axel Weber said German inflation is a cause for concern, reducing expectations for rate cuts by the ECB.
That came after a report late last week showing the biggest US job losses in five years reinforced expectations for further interest rate cuts by the Fed.
US interest rate futures now indicate that traders see about a 60 per cent chance that the Fed will lower rates by 75 basis points next week, versus a 100 per cent chance earlier this week.
Prospects for an emergency rate cut before the central bank's next policy meeting on March 18 have faded following the announcement of the new liquidity steps.
The dollar dipped 0.4 per cent to 103.00 yen but stayed well above an eight-year low of 101.40 yen struck on electronic trading platform EBS on Friday.
The dollar eased 0.3 per cent against the Swiss franc to $1.0305 a day after it posted its steepest one-day rise versus the Swissie in more than three years.
Despite the dollar's sharp rally on Tuesday, some market participants said the US currency's gains were probably not sustainable, especially as recent US economic data had worried some investors that the United States is already in a recession.
Adding to scepticism about a further rise in the dollar are doubts that the Fed's liquidity steps will solve the fundamental problems that credit markets are facing.
"The Fed's measure only highlights how critical the situation is," said a dealer at a European bank in Tokyo.
Hurt by writedowns of US subprime mortgages and related securities, banks are increasingly reluctant to extend credit to investors such as hedge funds, triggering a cycle of margin calls and forcing selling across markets such as those for high-quality US mortgage bonds.
The dollar has been hit by persistent sell-offs in recent months on concerns that tightening credit conditions, sparked by the US subprime housing meltdown, will strain the flow of funds in the broader economy. (Reuters)
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