Dollar slips to record low despite Fed rate cut

The Federal Reserve cut interest rates by a quarter point to 4.5 per cent yesterday, sending the dollar to a record low against the euro.

The Fed said its second successive rate cut "should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time".

The dollar declined to $1.4474 per euro by mid-afternoon in New York from $1.4432 late on Tuesday, and touched $1.4504, the weakest since the European currency's debut in January 1999.

The Fed predicted that "the pace of economic expansion will likely slow in the near-term, partly reflecting the intensification of the housing correction".

But the statement played down expectations of future rate cuts, noting that while readings on "core inflation have improved modestly . . . recent increases in energy and commodity prices" may put "renewed upward pressure on inflation".

Bank of Ireland chief economist Dan McLaughlin said the Fed's quarter-point cut is likely to be followed by a similar move at its December 11th meeting.

"In the housing market itself, financial conditions remain strained in the wake of the rise in subprime delinquency, increasing the risks that the housing correction proves deeper and more protracted than the Fed expects," he said.

The IMF has forecast that the world economy will expand by 4.8 per cent, which Dr McLaughlin said was only a modestly slower rate than its 5.2 per cent estimate for this year.

The Fed's statement was released after the European markets closed yesterday, meaning the reverberations from the move are likely to be felt on European stock indices this morning.

In the US, stocks pared modest gains made before the meeting ended and the S&P 500 and Dow Jones were both in negative territory at mid-afternoon.

The rate cut follows an accelerated decline in the housing market that has confirmed some of central bankers' worst fears and exacerbated jitters in financial markets. Disappointing earnings in the banking sector and downbeat corporate forecasts added to concerns about a slowdown in activity, despite a strong overall economic performance last quarter.

"This one was for the banks. The cut is intended to keep money flowing freely and stem the risk of spillover from the financial markets to the real economy," said Jeoff Hall, an economist at Thomson Financial.

As well has hitting a new low against the euro, the dollar dropped against a basket of 12 other major currencies. The biggest gainers among the world's major currencies were the Australian dollar, South African rand and Brazilian real. - (additional reporting, Bloomberg/Financial Times service)