Euro falls as dollar makes some rally after rate cut

The euro fell on Thursday, nearing a one-month low against the dollar as the US currency recovered from losses suffered after the Federal Reserve kept alive the possibility that interest rate cuts may continue.

The single currency tumbled more than half a per cent as movements were exacerbated in holiday-thinned trade in Europe. The dollar also headed towards a two-month high against the yen. The US currency recovered losses suffered after investors were initially unconvinced that a 25 basis point interest rate cut by the Federal Reserve to two per cent on Wednesday would be the last of its loosening cycle.

Mitul Kotecha, head of global foreign exchange research at Calyon, said traders may have gotten ahead of themselves in thinking that the Fed's policy statement, which balanced the need to bother forestall a recession and ease inflationary pressure, was a sure suggestion that more rate cuts would come. "Many people thought the Fed would mark the end of the [easing] cycle and they didn't and the dollar suffered," Kotecha said.

"But I think the Fed should not have been expected to do that anyway… clearly they weren't as negative in the comments yesterday as they have been in the past so you could say perhaps it was a little bit more positive for the dollar." He also said thin liquidity had aggravated euro losses.

The euro tumbled more than half a percent to $1.5518, dropping from a session high $1.5643 and heading towards a one-month low. The dollar rose 0.2 per cent to 104.19 yen, approaching a two-month high of 104.87 yen hit on Wednesday.

Some traders also said the Bank of England's Financial Stability Report, which said the scale of losses from the credit crunch may not be as bad as feared, was prompting buying in the dollar and sterling.

The report pushed sterling up to a session high of $1.9909. By 0815 GMT, it was up 0.1 per cent at $1.9883.

The US central bank, which has now cut rates by 3.25 percentage points since September, said "substantial" rate reductions were now in place, while noting rising prices for energy and other commodities.

It also dropped a phrase contained in its last announcement that "downside risks to growth remain".

A Reuters poll conducted after the meeting showed 17 out of 19 US primary dealers do not expect the Fed to cut interest rates at its next meeting. (Reuters)

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