Yen surges as rate cuts fail to soothe markets

Initial euphoria over the rate cuts earlier in the session quickly fizzled. U.S. stocks fell in volatile trading and credit markets remained effectively gridlocked. High-yielding currencies such as the Australian and New Zealand dollars tumbled as risk aversion remained high.

"I think it's essentially too little, too late. That's the best summation of what's going on in the market," said Kathy Lien, director of currency research at GFT Forex in New York. "Unfortunately, they (central banks) should have taken this action before the Reserve Bank of Australia cut interest rates a full percentage point earlier in the week, but the RBA has essentially raised the bar."

"What the markets think is that this is a step in the right direction, but unfortunately, it has not unlocked the credit market," she added. "Liquidity is still at a premium right now and that's weighing on the market's risk appetite."

In midday trading in New York, the dollar traded down 1.9 percent at 99.480 yen. The euro also tumbled 1.1 percent to 136.16 yen., after falling as low as 134.20 yen, the lowest level since August 2005.

The U.S. dollar remained weaker against a basket of six currencies, but had come off lows hit earlier in the session following the global easing announcement, which some analysts said curbed the recent safe-haven bid for the greenback.

The ICE Futures U.S. dollar index, which tracks the greenback against a basket of six currencies, was last off 0.4 percent at 80.786, after hitting a low of 80.399.

The euro last traded up 0.5 percent at $1.3683.

"The dollar can remain underpinned by the notion that interest rates abroad are likely to fall at a faster pace than they are here," said Omer Esiner, senior FX analyst at Ruesch International in Washington. "(But) the euro can get some more near term support support from the idea that officials there are trying to get ahead of the curve."

High yielding commodity currencies tumbled, with the Australian and New Zealand dollars falling to five-year lows at US$0.6439 and US$0.5791, respectively.

Against the yen, the Aussie dollar lost 8.5 percent to 66.83 and the kiwi fell 6 percent to 60.03.

Volatility to persist

In an attempt to stem the worst financial crisis since the 1930s, central banks around the world cut interest rates by a half-percentage point on Wednesday in the first coordinated move since the Sept. 11 attacks.

That cut lowered the Fed's benchmark overnight lending rate to 1.5 percent and took its discount rate to 1.75 percent. The ECB cut rates to 3.75 percent while the Bank of England took its rate to 4.5 percent.

The coordinated move followed steep losses in world equity markets. Overnight, the Nikkei average plunged 9.4 percent, its biggest drop since the 1987 stock market crash.

Financial markets are expecting the Fed and other major central banks to further lower interest rates and inject liquidity, analysts said.

Currency strategists at Wells Fargo reckoned that Wednesday's global central bank easing affirmed expectations that major central banks led by the Fed, will keep doing whatever it takes to stabilize global financial markets.

And that could spell weakness for the U.S. dollar.

"If and when markets stabilize - and we believe central banks will keep acting until that occurs - we expect significant corrective dollar weakness as the dollar hoarding that is currently dominating FX markets dissipates," Wells Fargo said in a research note.

"While it is difficult to know when and at what level that corrective dollar weakness will begin, we expect that dollar could drop by around 7.5-10 percent against a broad range of currencies in just a matter of weeks."