Dollar Dives After Fed Rate Cut

Wednesday October 31, 6:34 pm ET
By Tali Arbel, AP Business Writer

Dollar Slumps Against Euro, Pound, Canadian Dollar As Fed Announces Quarter-Point Rate Cut
NEW YORK (AP) -- The dollar skidded to a new low against the euro Wednesday while the British pound broke through $2.08 after the Federal Reserve lowered a key interest rate by a quarter percentage point to 4.5 percent.

The Canadian dollar bought more than $1.06 for the first time since 1957.

The 13-nation euro soared to $1.4503, its fourth new high in as many trading days, while the British pound bought $2.0813, after having hit a high of $2.0822 Wednesday.

The euro bought $1.4434 in New York late Tuesday, while the pound was worth $2.0679.
The Canadian currency was trading at $1.0571, or 94.60 Canadian cents, shortly after the announcement, above the 47-year high of $1.0510, or 95.15 Canadian cents, it hit Tuesday. The dollar bought 95.35 Canadian cents late Tuesday.

The dollar continued to plunge against the Canadian dollar in later trading, buying 94.16 Canadian cents. The Canadian dollar was worth $1.0620, the first time it broke through $1.06 in 50 years.

"The stock market is going to think very highly of this (rate cut), but it will continue to undermine the dollar," said Michael Woolfolk, senior currency strategist at the Bank of New York.

The Fed's statement was intended to signal a continued openness to cutting rates, while indicating that inflationary pressures made doing so risky, he said.

Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.

"Currency traders are not buying into the relative hawkishness cropping up in this month's statement," said Ashraf Laidi, chief currency analyst at CMC Markets U.S. "While the outlook for the Fed is between further rate cuts and no rate cuts ... rates will remain unchanged if not go up for foreign banks," he said, causing currency traders to drop the dollar.

The rate-cut announcement, while expected, drove the dollar down, even as new U.S. data showed the economy grew at a 3.9 percent pace in the third quarter, the fastest pace in 1 1/2 years.

A second report showed that construction spending rose 0.3 percent in September, the best showing in four months.

The euro, the Canadian dollar and the pound have been climbing steadily against the dollar, regularly touching new highs since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

The euro has been helped by sentiment that the European Central Bank has yet to finish a gradual campaign of rate increases, while the pound has benefited from expectations that the Bank of England will leave rates untouched rather than follow the Fed in cutting the cost of borrowing.

The Canadian dollar, a commodity-backed currency, has benefited as oil prices soared and demand for Canada's exports increases.

In other trading, the dollar rose against the Japanese currency, climbing to 115.31 yen from 114.77 yen Tuesday. However, the dollar slid against the Swiss franc to 1.1565 from 1.1600.