LONDON (AFP) - The dollar was weaker against the euro Tuesday after the US central bank cut interest rates by an unprecedented three quarters of a point in an effort to keep the US economy out of recession.
Dealers said the dollar had a rollercoaster ride to match that of stocks as investors tried to get a fix on the US outlook amid growing worries the collapse of the US housing market will put the economy into reverse.
The US Federal Reserve said it cut its benchmark interest rate to 3.50 percent from 4.25 percent because of a "weakening of the economic outlook and increasing downside risks to growth."
There had been growing speculation the Fed would act before its scheduled end of the month meeting following Monday's rout on the Asian and European bourses but the move still surprised and caused some concern that the situation must be really bad to merit such a dramatic measure.
"The implications for the dollar are slightly complicated," said Derek Halpenny, senior currency economist at the Bank of Tokyo Mitsubishi UFJ.
"Risk aversion has in recent days come to the aid of the dollar ... however, further aggressive monetary easing will substantially erode any yield support for the dollar," Halpenny said.
"We suspect the current risk aversion support for the dollar will give way to the negative yield developments that are now more apparent after this inter-meeting cut," he added.
In late European deals, the euro was quoted at 1.4616 dollars, jumping off an early low of 1.4365 dollars and 1.4455 dollars in New York late on Monday.
Halpenny said the Fed's surprise move also raises the spectre of more bad news on the economic front, known to the Fed but not the markets.
"There will now be inevitable speculation that the Fed is in possession of specific information that has increased concerns over the fallout from the banking sector write-downs of mortgage-related securities."
Dealers said the markets will now be looking very closely for any signal that the Fed could cut interest rates again at the end of the month, or as seems more likely, sit back and assess the impact of Tuesday's action.
Elsewhere, the pound weakened against the euro as speculation grew that the Bank of England could follow suit with a cut of 50 basis points, rather than 25 points to counter signs the British economy is flagging.
Dealers said forex players will also be watching how the stock markets now fare following a rollercoaster ride, swinging between losses and gains in Europe after earlier sharp falls in Asia.
All the major stock markets in Europe had tumbled by between five and seven percent on Monday.
Dealers said the fierce equities sell-off had been bad news for the euro, which had hit to a record high 1.4967 dollars in November owing to favourable interest rate differentials.
"US and Japanese investors have been sending their money in the direction of the Eurozone for nearly two years looking for better returns," said John Noonan, an analyst at Thomson IFR.
"European equity markets have been popular with US investors in particular.
"If the market turmoil continues and US and Japanese investors accelerate their repatriation efforts, the euro can fall steeply against the US dollar and yen."
In European trading on Tuesday, the euro changed hands at 1.4616 dollars against 1.4455 late Monday, at 156.11 yen (153.16), 0.7461 pounds (0.7437) and 1.6052 Swiss francs (1.6018).
The dollar stood at 106.75 yen (105.97) and 1.0986 Swiss francs (1.082).
The pound was at 1.9578 dollars (1.9434).
On the London Bullion Market, the price of gold rose to 875 dollars an ounce from 871.25 dollars late Monday.
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