By John Beresford-Peirse
London, Nov. 7 (Bloomberg) -- The dollar fell to its weakest level in four days against the euro after the Federal Reserve raised investors' concerns that the biggest economy may take longer than expected to recover.
The Fed yesterday pared its benchmark borrowing rate by 50 basis points to 2 percent, the lowest since 1961, to foster growth in an economy that's widely expected to fall into recession. The central bank said the economy may take longer to recover after the Sept. 11 attacks than previously thought, leaving open the possibility of another cut next month.
``There are nerves about what the Fed said,'' which is weighing on the dollar, said Simon Rubinsohn, who helps oversee 23 billion pounds ($33.6 billion) at Gerrard Ltd. The currency may also be weaker because some investors who bought it anticipating a reduction have now sold those dollars, he said.
One euro bought 90.23 U.S. cents, up from 89.71 yesterday. The dollar has risen 1 percent against the single currency this quarter. Against the yen, the U.S. currency was little changed at 120.89 from 121.14.
``Concerns about a deterioration in business conditions both here and abroad are damping economic activity,'' the Fed said in an accompanying statement.
Focus on Europe
Attention has shifted to the European Central Bank's policy- setting meeting tomorrow, where policy makers are expected to lower rates in a bid to revive slowing growth there, analysts said. All but one of the 24 economists surveyed by Bloomberg News on Friday predict a reduction of at least 25 basis points from 3.75 percent.
Currency markets have reacted favorably to rate cuts in recent months, although the fact that there has been no real sign of improvement in the U.S. after a series of reductions has concerned some investors.
The U.S. economy shrank at a 0.4 percent rate in the third quarter, unemployment rose last month to a five-year high and consumer confidence fell to a 7 1/2-year low. A rebound will be limited by a ``reallocation of resources'' to protect the nation in the aftermath of the terrorist attacks in New York and on the Pentagon, the Fed said.
``The market thought 2 percent would be the base in interest rates,'' said Kamal Sharma, a currency strategist at Commerzbank AG. ``If they cut further next month, it suggests the economy is in an even worse state than previously thought.'' That uncertainty is weighing on the dollar, he said.
Cutting to Come
The Fed's statement led 30 economists surveyed by Bloomberg News to say they expect a quarter-point cut at the Fed's Dec. 11 meeting. Two others expect a half-point reduction and 10 say the Fed will hold rates steady.
``The fact the Fed cut by half a percentage point and still suggested it will cut again means they have a very severe outlook for the economy,'' said Toru Umemoto, a currency strategist at Morgan Stanley Dean Witter & Co.
The dollar also may have weakened because of concern the central bank is running out of tools with which to boost growth, analysts said.
Considering the consumer price index was 2.6 percent higher last month than a year ago, the central bank's target rate is effectively below zero when adjusted for inflation.
``The euro should benefit from negative real U.S. rates,'' said Kirit Shah, chief market strategist at Sanwa International. That could push the euro up to 92, he said.
Credibility
Still, the dollar's decline could be limited amid speculation the U.S. may yet recover in the second half of next year and because of questions over the European Central Bank's credibility, analysts said.
While most economists expect a decline in borrowing costs in the 12 nations sharing the euro tomorrow, statements from ECB council member Ernst Welteke and central bank president Wim Duisenberg in recent days have sent mixed signals about the central bank's next move.
``The ECB's credibility issues keep hampering the euro,'' said Gerrard's Rubinsohn. ``There is a question mark over how they conduct monetary policy.'' A quarter-point cut tomorrow is the ``most likely'' outcome, which probably won't have much effect on the currency.
The ECB also may be seen as reacting to weak economic data, rather than paring rates in anticipation of further slowing, analysts said.
The euro was little changed after a report showed German manufacturing orders fell the most in six years in September.
A report yesterday showed German unemployment had the biggest rise in almost three years in October. A separate report showed consumers and businessmen in the dozen countries sharing the euro grew more pessimistic last month.
A half percentage point reduction by the ECB would be unexpected by the market and could buoy the euro, said Sharma at Commerzbank.