Dollar hits new low after Fed rate cut

NEW YORK (CNNMoney.com) -- The dollar enjoyed a brief bounce against the euro before sliding to a new all-time low after the Federal Reserve cut a key interest rate Wednesday.

As expected, the central bank lowered the federal funds rate, which affects how much interest consumers pay on everything from their credit cards to car loans, by a quarter of a percentage point to 4.5 percent.

The euro bought $1.4477, up from $1.4434, and briefly broke the key psychological barrier of $1.45 after the Fed's announcement to a new all-time high of $1.4505.

The dollar briefly pared some gains against the yen before moving higher against the Japanese currency.

Speculation that the Federal Reserve would announce a reduction in interest rates has left the dollar battered against the euro in recent weeks. The greenback has hit a succession of record lows against the 13-nation currency recently.

An interest rate cut typically bodes poorly for the dollar since it makes dollar-denominated investments worth less, and thereby less attractive to outside investors.

But currency experts argue that it will be hard for the dollar to avoid more near-term pain, even if the Fed discontinued its rate-cutting campaign.

"All roads seem to point south for the dollar at the moment," said Neil Mellor, a currency strategist at Bank of New York Mellon.

High interest rates at other central banks around the globe, such as those in Canada and Australia, are already attracting investors who have favored the dollar in years past.

And even though the U.S. economy revealed some underlying strength with Wednesday's third-quarter gross domestic product reading, there have been recent signs that the economy is slowing - a negative for the dollar. Adding to that are worries that troubles in the housing market will spill over to the larger economy, said Brian Taylor, senior currency trader at M&T Bank in Buffalo, N.Y.

"There is a huge amount of uncertainty," said Taylor. "We still do not know how the housing market will play out."

A lower dollar typically drives domestic and overseas demand for U.S. goods, but it also poses an inflationary risk to the economy by limiting consumers' buying power overseas and typically pushing up the price of oil.

How far could the dollar fall?

Taking a more conservative view, Taylor said he believed that the dollar could settle in at $1.45 against the euro in the near term. Mellor, however, said $1.50 remained a possibility.