The dollar sank against major currencies Tuesday after the Federal Reserve cut its target for a key interest rate to
an all-time low in a bid to stem the U.S.'s economic slide.
The central bank said it reduced the federal funds rate to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 percent.
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The 15-nation euro jumped to $1.3976 in late New York trading, peaking at $1.4148, its highest point since Oct. 1, from $1.3665 late Monday in New York. The British pound climbed to $1.5469 from $1.5253.
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Meanwhile, the dollar fell to 89.35 Japanese yen from 90.60 yen late Monday in New York, circling 13-year lows. On Friday, the buck bottomed at 88.16 yen, its lowest point since August 1995.
The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 percent. The lowest target rate before had been 1 percent, a level seen only once before in the past half-century.
The Fed also made clear that it intends to keep the funds rate at extremely low levels. Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.
Cutting interest can theoretically undermine a currency as investors transfer funds to where they can earn better returns.
"If you look at how the markets have traded in the past few weeks, the dollar has been sold off very steeply in anticipation of some Fed action," said David Solin of Foreign Exchange Analytics in Essex, Connecticut. "I think there is some chance the dollar will at least attempt to stabilize, just considering the size of the moves over the last few weeks."
The rate decision came on a day when investors received two more pieces of evidence on Tuesday that the economy was worsening: The Commerce Department reported a 18.9 percent drop in new home construction in November, while the Labor Department said consumer prices sank by 1.7 percent.
Meanwhile, Wall Street remained nervous about the growing list of firms and individual investors affected by investment manager Bernard Madoff, who is accused of scamming investors out of billions of dollars.
In other New York trading, the dollar fell to 1.2127 Canadian dollars from 1.2389 late Friday, and dropped to 1.1275 Swiss francs from 1.1602.
By Erin Conroy (AP)
