by Ashraf Laidi // Yesterday's unexpected action from the Federal Reserve to cut the fed funds rate by 50bps to 6% and the discount rates by 25 bps to 5.75%, gave the euro its largest dailypoint and percentage drop (3.7% vs yen and 3% vs dollar), while giving the NASDAQits largest daily and percentage point gain (14%). Even those market observerspreparing for an inter-meeting rate cut after next Friday's scheduled release of the USDecember jobs labor report, were caught off guard. A partial reason to the Fed'sshocking timing-instead of waiting until Friday's report-- could be to surprise financialmarkets on the upside, and to provide some support for deteriorating consumerconfidence. Indeed, the Fed is said not to target the stock market. But when thepopulous NASDAQ opens the New Year with a 7% drop, right after having registeredits worst annual performance ever (41% in 2000), the Fed's priority to restorecorporate and household sentiment supercedes its ideological objectives. Economicsentiment has worsened to the extent that markets are no longer displaying their usualbehavior of rallying right after release of weak economic reports. Shifting the bias ofmonetary policy became worthless to markets, and all what was needed were lowerinterest rates. Yesterday's renewed evidence that US manufacturing had slipped into arecession was also helpful in delivering today's rate cut. Not only the NAPM headlinenumber fell to its worst level since the 1991 recession, but also 5 out of 6 components(except prices) showed a sharp declines. Of the 20 industries included in the report,only the printing and publishing reported better business conditions in December.Today's rate cut could also by explained by the possibility that the Fed found some uglyevidence of a slowdown in an advanced release of the December labor report. Someobservers could explain today's abrupt move from Fed Chairman Greenspan as anattempt to avoid triggering a recession during the George W. Bush administration, justGreenspan was accused to have done to Bush Senior 10 years ago, by not easingmore. And what about the euro's 3.7% collapse against the yen and 3.0% drop againstthe dollar? Although the interest rate differential between the US and the Eurozone hasnow fallen by 50 bps to 125 bps, the single currency was the biggest loser. The euromove places the currency's rebound of the past 2 months in perspective. Since theeuro's surge had mainly stemmed from consistent evidence of a weakening USeconomy, today's abrupt rate move demonstrates the Fed's resolve to revive the USeconomy and support global growth. As a result, a rebound in the US economy couldstand in the way of the rebounding euro, especially when the George W. bush's fiscalstimulus is eventually enacted. And the resulting rally in US equities is the dollar's bestfriend and euro's worst enemy. When asked about today's rate cut, George W. Bushsaid the cut in interest rates was not enough and must be followed by across-the-boardtax cuts. Despite the positive US growth implications of today's interest rate cuts, theeuro is far from repeating last year's slide. With solid support at 92 cents, the euro stillhas the necessary tools (narrowing yield differential) to make it towards the 97-centlevel. Tomorrow's US labor report should be be the catalyst for a renewed eurorebound. Jan 03