U.S. Dollar Recovers after the U.S. Federal Reserve Liquidity Move

On Friday, March 7, 2008, the U.S. Dollar recovered from all-time lows as the Federal Reserve increased liquidity in the financial system.  This liquidity injection has heightened speculation that, in the short term, the Federal Reserve will not aggressively cut interest rates, even though recent reports show that activities in the U.S. service sector contracted in February of this year.

In order to mitigate liquidity pressures in the U.S. financial system, the Federal Reserve announced a series of activities, such as term repurchases, amounting to approximately $10 billion.  According to Head Currency Trader, Firas Askari of BMO Capital Markets in Canada, the liquidity injection by the Federal Reserve is the primary reason for the rebounding of the U.S. dollar versus other major currencies.  According to other analysts, the U.S. dollar also rebounded due to short-covering and profit-taking by investors, after 3 consecutive days of gains in the value of the Euro.

The latest liquidity move by the Federal Reserve is reflected in interest rate futures, as analysts are convinced that the Federal Reserve may not cut interest rates by as high as the expected 75 basis points at the next Federal Reserve meeting on March 18, 2008.  Currently, the Federal Funds rate stands at 3.0 percent, a reduction of 2.25 percent since the end of the 3rd quarter of 2007.

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