TOKYO - The dollar hovered close to record lows against the euro and a 12-year trough against the yen in Asian trade Tuesday as markets waited anxiously for a key US interest rate decision, dealers said.
The Federal Reserve was widely expected to slash its key lending rate later in the day to try to ease turmoil on Wall Street and ward off the threat of a prolonged recession in the world's largest economy.
The dollar slipped to 97.00 yen in Tokyo morning trade from 97.32 in New York on Monday, when it had earlier struck 95.75, the lowest since September 1995.
The euro firmed to 1.5747 dollars from 1.5725, edging up towards its all-time high of 1.5905 reached on Monday. The euro eased to 152.72 yen from 153.07.
Investors were anticipating a bold move by the Fed to try to ease strains on the US financial system, with some traders betting on a rate cut of as much as 100 basis points, twice as much as had been expected just last week.
The meeting follows an emergency cut by the Fed to one of its other rates on Sunday after Wall Street giant Bear Stearns fell victim to the credit crunch.
Markets are "eager to see if the Fed will offer a follow-through rate cut ... with the market now bracing for a 100 basis points rate cut," said NTT Smarttrade director Takashi Kudo.
But he said the market "now thinks that a rate cut alone cannot resolve the bad debt problem and stem the deterioration of the economy," so the dollar may resume its downturn.
The Federal Open Market Committee (FOMC) has already slashed its key federal funds interest rate by 225 basis points to 3.00 percent since September to try to bolster the economy in the face of a US housing slump and related credit crunch.
The rate cuts have weighed heavily on the dollar as investors and speculators moved into high-yielding currencies.
The woes of Bear Stearns, which is being sold to JPMorgan Chase for a rock-bottom price, has sent shivers through global markets.
Investors fear that the Fed may be running out of ammunition to ease gridlock in US credit markets. Some analysts said that even a bold rate cut by the Fed later Tuesday would not be enough to prop up ailing markets.
"Once the FOMC makes the (rate cut) announcement, US share prices will collapse and Treasuries will be sold off," predicted Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.
"We are experiencing a meltdown in financial markets and the market is aware of the risk that this will have deeper consequences than an economic slowdown," he wrote in a note to clients.
Markets were waiting nervously for earnings results from US investment banks Lehman Brothers and Goldman Sachs later Tuesday, followed by Morgan Stanley on Wednesday, amid fears of fresh victims from the credit market turmoil.
"JPMorgan's acquisition of Bear Stearns, which was on the brink of collapse, at a fire sale price, served to ignite investor fears about other banks possibly suffering liquidity problems," noted NAB Capital strategist John Kyriakopoulos.
Traders were also on alert for any signs that global financial authorities are considering coordinated action to try to stem the dollar's decline.
bur-kdf/dr/lh
03/18/2008 03:23 GMT