Dollar drops ahead of expected interest-rate cut

Dollar drops across the board, at 2-month low vs euro as Fed is expected to cut rates

NEW YORK (AP) -- The dollar dropped to a two-month low against the euro and fell against other major currencies Monday as the Federal Reserve's last interest-rate meeting of the year got under way.
The 15-nation euro jumped to $1.3665 in late New York trading, peaking at $1.3722, its highest point since Oct. 14, from $1.3371 late Friday in New York.
Meanwhile, the dollar fell to 90.60 Japanese yen from 91.12 yen late Friday in New York, circling 13-year lows. On Friday, the buck bottomed at 88.16 yen, its lowest point since August 1995.

On Tuesday, the Federal Reserve is expected to lower its key interest rate to 0.5 percent from 1 percent. Cutting interest can theoretically undermine a currency as investors transfer funds to where they can earn better returns.

"While this seems significant on the face of it, in reality the effective Fed Funds rate (the overnight rate which is eventually negotiated between banks) is already trading well below that level," said Brian Dolan, chief currency strategist at Forex.com.
The British pound also climbed to $1.5253 from $1.4969, despite hitting its sixth consecutive record low against the euro in as many trading days. The pound fell as low as 1.1080 euros on Monday.

Other factors dragging down the dollar were concerns over the bailout of Detroit automakers, said Ashraf Laidi, chief market strategist for CMC Markets US, and whether extending a lifeline to the U.S. car manufacturers would help the industry in the long term.
On Air Force One, President Bush said Monday that an "abrupt bankruptcy" in the auto industry would be "devastating" for the country's economy. He said that help from the TARP, or Troubled Asset Relief Program, remained an option.

"An interim bailout plan for U.S. automakers by the Bush administration is certainly weighing on the dollar, with many being skeptical as to how the industry can cope in the longer term and instead thinking that letting the market take its course would be a preferred route," said James Hughes, a currency analyst at CMC Markets said.
"However, we've seen this before and the negative sentiments associated with the dollar over this isolated point will potentially prove short lived."

The greenback often trades lower going into the end of the year.
In other New York trading, the dollar fell to 1.2389 Canadian dollars from 1.2432 late Friday, and dropped to 1.1602 Swiss francs from 1.1767.

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