The US currency plunged against a host of other key currencies late Monday, after the US Federal Reserve initiated another unexpected interest rate reduction and other big lenders took steps to ease a shortfall in dollars in the financial markets.
The US Federal Reserve has cut rates to a target range of 0 percent to 0.25 percent and said it will increase its balance sheet in the coming weeks by at least $700 billion.
The dollar dropped 106.80 by 1.1 percent against the yen, while the euro rose to $1.1146 by 0.3 percent. According to Morgan Stanley, global financial markets are now in a bottom-up process and investors will start risking and sell the greenback.
The Fed, along with five other major international central banks, is also cutting its swap lines to promote the supply of dollars to financial institutions faced with credit market stress.
The move comes as policymakers respond to a brutal month-long sell-off in financial markets. Ray Attrill, head of the strategy for FX at Sydney's National Australia Bank, said that for the US dollar it's a moderate negative reaction. The Fed acted "a little bit faster and a little more vigorously" than others expected, he said.
Analysts anticipate more weakness in the US dollar, guided by the interrelated combination of aggressive Fed easing and a turnaround in tactical risk.
The U.S. Dollar Index can hit levels of 95, analysts noted, if not break. The index fell Monday to 98,409 by 0.3 percent following last week's 2.9 percent jump.
Market observers also said that the central bank feels that what the governments are initiating are not enough, so "they are hurling everything they can in this particular situation," Juan Perez, head of currency trading at Tempus Inc. in Washington said.
During late Sunday sessions, the USD was down 1.3 percent against the Japanese yen to 106.71 yen, while the euro inched up 0.8 percent to $1.1190. Against the Swiss currency, the USD weakened 0.5 percent to 0.9446 francs. The total dollar index fell 0.8 percent at 97.732.
New Zealand's central bank joined the global easing race with a cut of 75 basis points, while the Reserve Bank of Australia added A$5.9 billion through market repo operations.
The Fed was originally set to announce a policy decision on Wednesday and the Bank of Japan is conducting a two-day meeting which ends Thursday, while central banks have been forced to restore stability to financial markets. The Chinese yuan, on the other hand, rose 7,0131 per USD on the offshore market as traders awaited the main economic data from China.
