Fading chances for deeper Fed rate cut lift dollar

The dollar rose on Friday as investors scaled back bets for another aggressive Federal Reserve interest rate cut next week and on optimism a $150 billion stimulus package would help support the US economy. However, concerns about an extended fall in US equities gave some support to the Japanese currency up against the greenback.
US stocks extended losses early in the afternoon and safe-haven Treasury bond prices rose, reflecting considerable uncertainty about the near-term outlook. The Fed's emergency three-quarter-percentage-point rate cut on Tuesday, precipitated by sharp falls in global stocks, prompted investors to price in a half-point reduction from the US central bank at next week's scheduled policy meeting.
Losses in European stock markets on Thursday and earlier on Friday are now being largely linked to fallout from a trader scandal at the French bank Societe Generale, which Fed policy-makers were apparently unaware of. Rate futures suggest a 76 percent perceived chance of a 50 basis-point reduction in the fed funds rate target to 3 percent at the Fed meeting January 29-30.
The euro dropped to a session low of $1.4661, according to Reuters data. It was last trading at $1.4671, down 0.6 percent on the day. Some traders cited profit-taking ahead of the weekend. The dollar slid to an intraday low of 106.75 yen, tracking the slide in equities. It was last trading down 0.2 percent on the day at 106.98 yen.
With the European Central Bank's main interest rate at 4 percent and monetary authorities maintaining their hawkish inflation rhetoric, aggressive Fed easing would further undermine the dollar's yield appeal against the euro.
Against the Swiss franc, the dollar rose 1 percent to 1.0975. Higher yielding currencies such as the British pound and Australian dollar rose marginally against the greenback. Weaker-than-expected consumer inflation data held the Canadian dollar down against the greenback as it backed expectations of a rate cut from the Bank of Canada. The dollar was up 0.3 percent at C$1.0058, off a session peak of C$1.0109.