Dollar falls against yen, euro

Japanese currency surges to 13-year high against greenback following U.S. central bank slashing rates.

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By Lara Moscrip, contributing writer

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NEW YORK ( -- The U.S. dollar fell to a 13-year low against the yen and weakened against the euro Wednesday, a day after the Federal Reserve cut its key short-term interest rates to historic lows.

The Japanese currency reached a 13-year high against the dollar Wednesday, falling to ¥87.23 from ¥88.95 late Tuesday. The last time the yen was this strong was July 1995. Since mid-September, the yen has gained nearly 15% against the dollar.

The Bank of Japan will make an interest rate announcement on Friday. Many of the bank's watchers expect it to hold the rate firm at 0.3%, according to Steve Malyon, currency strategist at Scotia Capital. Japan has the second-lowest interest rate among the world's major economies.

The euro jumped 3.8 cents against the dollar Wednesday, to $1.4418 from $1.4038 late Tuesday. The last time the euro was this strong against the dollar was in late September. Since then, the dollar has gained 2.57% against the 15-nation currency.

The European Central Bank's next meeting is set for January, and investors are watching to see whether the bank will keep its rate firm after slashing it to 2.5% earlier this month.

The dollar made a slight gain Wednesday against the pound, on news of a high level of U.K. jobless claims and that the Bank of England held back when it lowered interest rates to 1 percentage point at its Dec. 4. meeting, fearing a bolder move could pose a risk to the economy.

The rate holds at 2%, the lowest in the bank's history, and it is expected to be lowered once again when policymakers meet in January, according to a note Malyon wrote to investors.

The pound dropped to $1.5534 from $1.5581 late Tuesday. The dollar has gained 14.3% against sterling since mid-September.

Concerns ahead

On Tuesday, the U.S. central bank cut its federal funds rate from 1% to a range between 0% and 0.25%, the bank's 10th cut since September 2007.

While interest rate cuts are the Federal Reserve's main tool for boosting economic activity, many currency analysts worry about the long-term effects of lower interest rates on the dollar.

Cutting interest rates to such historic lows could drive up inflation and reduce the appeal of many assets that are priced in dollars.

Meanwhile, the dollar's status as the world's reserve currency is being hampered by lower rates and the cost of the government's bailouts, according to Ashraf Laidi, currency strategist at CMC Markets.

In addition to aggressive rate cuts, the government has been forced to essentially print more money to help pay for several new initiatives aimed at aiding the weak economy. Flooding the economy with cash has helped ease the credit crunch, but it has also worked to undermine the dollar's strength, Laidi said.

Having interest rates approaching 0% gives rise to "ominous prospects for the greenback once global economic stability starts to build up," Laidi said.


Oil sank to a 4 1/2-year low after OPEC reported it will cut production in a bid to prop up prices driven lower by global economic downturn.

U.S. crude for January delivery sank $3.54 to settle at $40.06 a barrel on the New York Mercantile Exchange, the lowest settlement price since July 13, 2004, when oil settled at $39.44. To top of page

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