HONG KONG (Thomson Financial) - The US dollar gained slightly against the yen and euro in Asian afternoon trade Wednesday after the Federal Reserve announced a 25-basis-point interest rate cut.
While most investors had expected the central bank to lower its fed funds rate by a quarter percentage point, some had been hoping for a deeper half-point reduction to ease the credit crunch and counter a housing and banking slump.
But a 50 bps rate cut would have been negative for the greenback as it would discourage investors from holding on to their dollar-denominated investments.
"The drop in the interest rate is not as much as some people thought" it would be, said Mark Wan, chief analyst at Hang Seng Investment Services Ltd.
"That's why we saw some funds flowing back to US Treasuries."
At 1.00 pm (0500 GMT), the dollar was trading at 110.92 yen, up from 110.735 in Sydney this morning and from 110.62 in late New York trade. The euro was quoted at 1.4658 dollars, down from 1.466 this morning.
Following the Fed rate cut, US Treasury prices rose overnight, pushing down the yields. The benchmark 10-year US Treasury yield fell to 3.973 percent from 4.092 percent shortly before the announcement. Bond prices move inversely with yields.
Also boosting the greenback are moves by some fund managers and hedge funds to trim their holdings as the year-end approaches and hold on to their cash.
"There are some redemptions of investments and investors prefer to keep more cash. And in today's market, the major trading currency is still the US dollar," said Wan.
The dollar's strength against the yen could be short-lived though, as most analysts expect the Japanese currency to strengthen further.
The yen may climb to 109 versus the dollar by year-end, said David Mann, currency strategist at Standard Chartered Bank.
Read more:Forex - Dollar bounces back slightly after Fed's tame interest rate cut
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