$ Weakens, Euro Stocks Up As Fed Leaves Rates Unchanged

Stocks in London, Frankfurt and Paris put on a healthy performance, shrugging off a 20-point overnight drop on Wall Street after the US failure to tighten credit.

But the dollar slipped against the mark by over half a pfennig when currency markets, which had priced in a 0.25 per cent rise in US rates, were caught out by the policy-making Federal Open Market Committee's decision to leave them unchanged.

Analysts said the move was a calculated gamble that the American economy will slow before inflation starts to rise. But it disappointed forex markets where higher rates would have made dollar-based assets more attractive to investors.

 

The Fed's taking a risk and the dollar's vulnerable to any sort of strong data or any pick-up in inflation, said Keith Edmonds, chief analyst at IBJ in London.

The Fed's inaction had many market watchers concerned that a reluctance to increase rates ahead of the US elections had influenced its decision.

The US currency proved much hardier against the yen, bouncing back from overnight lows beneath 109 yen to stand again at the 110 level.

But the dollar's inability to scrape higher against the mark worried the markets, especially with the German currency weakening amid worries about Russia, where Germany is heavily invested.

We would see further near-term losses for the dollar against both the mark and the yen, with dollar-mark initially looking more vulnerable, said Chase Investment Bank in a note.

European equities looked much healthier. In Frankfurt, stocks on the DAX index hit a trading record of 2659.66 points, eclipsing the previous high of 2650.49, before falling back slightly.

German shares initially weakened on profit-taking but the current bull-run quickly regained momentum, supported by stronger government bonds, dealers say.

London, Europe's biggest bourse, climbed by 0.3 per cent but the mood was tense and traders said the gains were likely to be limited unless Wall Street rebounds from Tuesday's decline.

We're just in limbo until the Fed finally does move (rates), said one trader.

Most clients are a bit confused, a broker added.

When that happens, real investors tend to sit on the sidelines and the futures market takes control.