By Dhara Ranasinghe
LONDON, Nov 7 - The dollar fell one percent against the euro and Swiss franc on Wednesday as worries grew that the Federal Reserve is running out of ammunition to boost the fragile U.S. economy.
The Fed on Tuesday delivered its 10th rate cut of the year, lowering its key rate half a point to a 40-year low. But with worries creeping in over how much more the Fed can do to boost growth, the dollar reversed its initial post-rate cut gains and fell to 2-1/2 week lows versus the yen.
Europe's single currency, awaiting an interest rate decision from the European Central Bank on Thursday, rallied more than half a percent against the yen. It was helped by talk China may be set to increase its euro reserves by 10 percent although Chinese authorities declined to comment on the matter.
"After the initial (U.S. rate cut) news was digested, there was a sentiment entering the market that the impact of interest rate reductions was starting to run out of steam," said Harley Dale, international economist at Westpac in London.
"There is not a lot left that the Fed can do," he added.
At 1245 GMT, the dollar hovered just above the day's lows around $0.9047 per euro and 1.6260 Swiss francs . It earlier fell to 2-1/2 week troughs around 120.75 yen .
The euro stood around 109.05 yen , up more than half a percent on the day with dealers citing speculation that China could raise its euro reserves as a reason behind euro gains.
China does not comment on the composition of its reserves although the bulk is believed to be held in U.S. dollars.
The euro showed little immediate reaction to news German September industry orders fell 4.1 percent, against market expectations of a 2.2 percent decline.
U.S. GROWTH WORRIES MOUNT
Worries over U.S. growth were reflected in weakness in U.S. stock futures, further souring sentiment towards the dollar.
"The initial knee-jerk reaction to the Fed's rate cut was positive for stocks and the dollar," said Paul Mackel, currency strategist at Dresdner Kleinwort Wasserstein in Frankfurt.
"But you have to start wondering when all this stimulus will help the economy and this is one of the reasons why the dollar has come under broad pressure today."
The interest rate differential between the U.S. and the euro zone were also seen working against the greenback. Tuesday's rate cut puts euro zone benchmark interest rates at almost double the level of their U.S. counterparts, raising the appeal of euro-denominated assets.
Analysts said that weakness in the price of oil, which is bought and sold in dollars, was also a cause of concern for the U.S. currency.
Oil prices on Wednesday hovered around their lowest level in two years below $20 per barrel.
"A fall in oil prices to around $19 per barrel is not supportive for the dollar," said Matthew Clements, economist at Prebon Marshall Yamane.
ON THE AGENDA
Dealers were awaiting third quarter U.S. productivity and unit labour cost data at 1330 GMT.
Beyond this, the focus remained on Thursday's ECB interest rate announcement, with markets expecting a quarter point cut.
ECB council member Ernst Welteke said earlier the global economy was in a phase of pronounced weakness and uncertainty but he was "cautiously optimistic" the euro zone would recover in the medium term.
The yen, meanwhile, failed to benefit from dollar weakness with some focus on Japan's recent intervention to weaken the yen.
Earlier in the day, the Ministry of Finance (MOF) said it had spent 3.2 trillion yen ($26.42 billion) on intervention in the July-September quarter, a record amount for a quarter.
That aggressive intervention pushed the dollar from lows around 115.80 yen in late September to a high above 123 yen hit in late October.
The dollar was little moved by brewing financial turmoil in Argentina, despite the United States' close economic links with the country. Argentina's government unveiled a debt-restructuring plan on Tuesday that it hoped would revive its troubled economy.