Dollar Recovered From Fed Rate Cut by Yan Xu

The dollar today pared its loss from the Fed’s aggressive rate cut as investors believe the rate cut will help the US economy. The currency fell sharply yesterday after the Fed slashed interest rates by 50 basis points yesterday.

US equities gained further today with the Dow Jones Industrial Average rose 76.17 to 13,815.56 and the Standard & Poor’s 500 index rose 9.25 to 1529.03 at 4:15 pm. The rally in stock market stimulates carry trades modestly. The yen weakened to above the 116 level against the dollar.

The euro failed to extend beyond the record high at 1.3687 set on as traders sold the euros to protect option bets at 1.40 against the dollar. The pair consolidates in range between 1.3940 and 1.3987.

Earlier in the US session, a bunch of inflation and housing reports came out weaker than expected, supporting the rate cut yesterday. US CPI declined 0.1% in August, below the estimate of an unchanged reading. Excluding food and energy, core CPI rose 0.1%, less than the estimate of 0.2%. US housing starts dropped 2.6% to an annual rate of 1.33 million units in August, while building permits fell 5.9% to 1.307 million units.

Tomorrow will see US weekly jobless claims, August leading indicators, and September Philadelphia Fed index.

The sterling was still under pressure from the liquidity problem in UK banking system due to subprime issue. After Northern Rock was bailed out last week, the Bank of England announced today to allow commercial banks to use mortgages as collateral to borrow via three-month repos. The sterling fell off the high at 2.0172 set Tuesday to the key level at 2 versus the dollar.

EURUSD will face interim resistance at 1.40, followed by 1.4020 and 1.4050. Additional ceilings will emerge at 1.4080, backed by 1.41. Support starts at 1.3950, backed by 1.3930, 1.39 and 1.3880. Subsequent floors are eyed at 1.3850.

USDJPY encounters interim resistance at 116.30, backed by 116.50 and 116.80. Subsequent ceilings will emerge at 117, followed by 117.30 and 117.50. On the downside, support begins at 116 and 115.70, followed by 115.50. Additional floors are eyed at 115.30, backed by 115 and 114.70.

GBPUSD encounters interim resistance at 2.0030, backed by 2.0070 and 2.01. Subsequent ceilings will emerge at 2.0140, followed by 2.0170 and 2.02. On the downside, support begins at 2, followed by 1.9980 and 1.9950. Additional floors are eyed at 1.9930, backed by 1.99 and 1.9870.