Dollar Falls Against Euro After Fed Cuts Rate by Half a Point

By Stanley White

Oct. 30 (Bloomberg) -- The dollar fell below $1.30 per euro for the first time this week after the Federal Reserve cut its target lending rate to the lowest in a half-century, saying risks to the economy remain.

The greenback declined before a U.S. government report today that may show the world's biggest economy contracted by the most since 2001. The yen fell as a rally in Asian stocks encouraged investors to buy higher-yielding currencies. The Australian dollar rose on speculation a rate cut in China, the world's largest consumer of industrial metals, will boost demand for Australia's exports.

``The Fed is doing what it can given a weakening U.S. economy,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. based in Tokyo. ``This puts the focus on the interest-rate differential, and that will force the dollar to go lower.''

The dollar fell to $1.3074 per euro, the lowest since Oct. 22, and traded at $1.3044 as of 9:25 a.m. in Tokyo from $1.2963 late yesterday. The yen weakened to 98.35 per dollar from 97.39. The euro gained to 128.32 yen from 126.26 yen. The pound strengthened to $1.6438 from $1.6373.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, fell 0.5 percent, extending the biggest decline since October 1998. It touched the highest level since April 2006 on Oct. 28.

The Australian dollar rose to 67.62 U.S. cents from 64.98 cents late yesterday in Asia. China, Australia's biggest trading partner, late yesterday reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent. The People's Bank of China also said in a statement on its Web site that the deposit rate will drop to 3.60 percent from 3.87 percent.

Fed Rate Cut

U.S. policy makers reduced the fed funds target by a half- percentage point to 1 percent yesterday, matching a level reached in June 2003 and before that during the Eisenhower administration in the late 1950s. The central bank also announced $120 billion in swap lines with Brazil, South Korea, Singapore and Mexico.

``The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,'' the Fed said in its statement.

The Canadian dollar gained the most in at least 37 years as its U.S. counterpart weakened and commodities including oil, natural gas, copper and gold increased. The loonie appreciated as much as 5 percent to C$1.2126 per U.S. dollar.

Ukraine's hryvnia slumped 10 percent to 7.0550 against the dollar after Central Bank Governor Volodymyr Stelmakh said the nation will default on its debt without a $16.5 billion loan from the International Monetary Fund. The nation's parliament has yet to approve the proposed loan.

Easing Bias

The U.S. central bank has cut its benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system to limit the severity of a recession.

The Fed joined the European Central Bank and counterparts of the U.K., Canada, Sweden and Switzerland on Oct. 8 in a coordinated reduction of rates, cutting its target by a half- percentage point to 1.5 percent.

``The easing bias in the U.S. is going to continue,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston.

The Fed cut the main rate to 1 percent in June 2003, leaving it unchanged for a year in response to deflation. The fed funds target averaged 0.68 percent in July 1958, during the second presidential term of Dwight Eisenhower.

The German government is preparing an economic stimulus package that will be ``targeted, bold and sustainable,'' Merkel said yesterday in a speech in Berlin. She said she won't support a ``broad'' stimulus program that would have only short-term effects in helping the economy.

Merkel didn't give any details or figures for the value of the measures. The Cabinet is scheduled to discuss the stimulus package on Nov. 5.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.