Dollar rises, euro falls ahead of expected ECB rate cut

The dollar rose and euro fell yesterday as the market tried to fathom the latest stock market tumble after another US government bailout for giant insurer AIG and a huge HSBC bank cash call.

Dealers said the markets expect another eurozone rate cut this week as the European Central Bank tries to get ahead of an economy sliding ever deeper into recession.

The single European currency in late-day trade was at 1.2600 dollars after 1.2671 dollars late Friday in New York.

The dollar was little changed at 97.63 yen after 97.65 yen on Friday.

"The dollar appears set to extend its recent gains, benefiting from its position as the safehaven currency of choice," said Lee Hardman, an economist with Bank of Tokyo Mitsubishi.

Dealers' anxiety level roses sharply on news that AIG ran up the largest quarterly loss in US corporate history, $61.7 billion, and would be the beneficiary of a fresh US government rescue worth $30 billion.

Adding to the pressure was a report from global banking titan HSBC that it needed nearly $18 billion of new capital to withstand the financial crisis.

Appetite for the euro was meanwhile dampened on speculation that the ECB on Thursday will lower eurozone interest rates by half a point to an all-time low of 1.50 per cent. The bank has cut its benchmark rate from 4.25 to two per cent since October.

Also weighing on the euro was a decision on Sunday by the European Union against launching an aid package for struggling eastern and central European members of the bloc.

The decision was "a major disappointment for the markets", said Neil Shearing of Capital Economics.

"The failure of European leaders to act decisively to provide financial assistance to the region will weigh on the euro," Mr Hardman added.

"The eurozone is tightly linked to the region through both trade and European bank lending with both channels likely to lead to eurozone economic growth underperformance."