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The US dollar tumbled to a 12-1/2 year low against the Japanese yen on Monday, and also saw record lows against the euro and the Swiss franc, as emergency liquidity-boosting measures by the Federal Reserve over the weekend failed to ease worries about the US financial system.
The greenback sold off in reaction to the Fed cutting its discount rate by 25 basis points to 3.25 percent on Sunday and after the opening up of the Fed's discount window lending to major investment banks, a tool not used since the Great Depression.
The Fed's move accompanied the purchase of Bear Stearns by J.P. Morgan Chase for just $2 a share, less than one-tenth of the bank's share price on Friday. The US dollar slid as much as 3.0 percent to below 96.00 yen, its lowest since 1995, bringing year-to-date losses to more than 13 percent.
"The Fed's announcement to triple the maximum maturity of discount window loans to 90 days and its $30 billion in funding of Bear Stearns less liquid assets not only indicated the grave situation posed to the counter party risk involved, but also highlights the increased ineffectiveness of the Fed's historic liquidity injections yet to date," said Ashraf Laidi, chief FX strategist, CMC Markets US in a research note to clients.
The dollar fell as low as 95.77 yen according to Reuters data, and saw historic lows 0.9637 Swiss francs after breaking below parity last week. The euro rose as high as $1.5904, having already added around 4.0 percent in the first two weeks of March, roughly doubling its year-to-date gains. It last traded at $1.5745.
Implied volatility, a key component of option pricing, in dollar/yen surged to its highest levels in around a decade both on the one-week and one-month horizon. In another report on Monday, the US Treasury Department said net overall capital flows in the country fell to its lowest level in four months in January. The inflows were not sufficient to cover the month's US trade deficit.
The euro saw some volatility when Market News International, citing a source, said the European Central Bank's Governing Council will likely express concern about the euro's rapid surge against the dollar in a co-ordinated "verbal intervention" over the next several days and weeks.
But the sources noted that "verbal intervention" doesn't mean actual central bank intervention in foreign exchange to stem the euro's rise against a weak dollar and the euro's moves were short-lived. Central banks in Europe, Japan and the US last jointly intervened in September 2000, propping up the euro after the currency hit an all-time low below $0.85, a loss of nearly 30 percent of its value from its January 1999 launch.

Copyright Reuters, 2008

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