The dollar edged higher on Thursday after the Federal Reserve lowered its benchmark interest rate in a surprise move aimed at cushioning the U.S. economy from the fallout of the global credit crunch.

The Fed’s decision to cut the discount rate, the rate at which it lends to commercial banks, by 50 basis points to 5.75 percent, initially sent the dollar tumbling. However, it later regained some ground as investors digested the news.

Market Reaction

Analysts noted that the rate cut, while intended to provide stability, also signaled concerns about the health of the U.S. economy. This mixed message created some uncertainty in the market.

Factors Influencing the Dollar

• Interest Rate Differentials: The Fed’s move narrowed the interest rate gap between the U.S. and other major economies, potentially making the dollar less attractive to investors.
• Economic Outlook: Lingering concerns about the housing market and overall economic growth continue to weigh on the dollar.
• Global Credit Conditions: The ongoing credit squeeze adds to the uncertainty and volatility in the currency markets.

Despite the slight recovery, the dollar remains vulnerable to further weakness if economic data continues to disappoint or if the credit crisis deepens.