Dollar drops after Fed cuts more than expected

The dollar fell against its major counterparts Tuesday, hitting a new record low against the euro, after the U.S. Federal Reserve cut its benchmark federal funds rate more than many investors had expected, thereby lowering the return on dollar-denominated assets.

The central bank cut the fed funds rate for the first time in more than four years to 4.75% from 5.25%, and also cut its discount rate by half a point. Most economists and investors had expected the Fed to trim its benchmark federal funds rate at least 25 basis points, with some predicting the 50-basis point reduction.

The dollar index, which tracks the greenback against a basket of six major currencies, was at 79.375, down from 79.645 before the announcement.

The pound sterling was at $2.0122, compared to $1.9982 earlier.

The dollar was up at 115.65 yen, down from 115.80 yen earlier.

While lower interest rates are dollar-negative in the long term, rallying stock prices after the Fed's policy decision provided daily support for the U.S. currency Tuesday.

"Expect further dollar weakness in the days to come and expect further strength in the stock market and carry trades," said Kathy Lien, chief strategist at Forex Capital Markets. Carry traders refer to the practice of borrowing funds in lower-yielding currencies and investing them in higher-yielding ones.

Stocks were trading solidly higher Tuesday, and surged after the Fed's announcement. See Market Snapshot.

Crude-oil futures were higher after the Fed move, after earlier touching a new front-month contract high of $81.50 a barrel on hopes that the expected interest rate cut will boost energy demand. See Futures Movers.

Source - Marketwatch.com