LONDON (Dow Jones)--European stocks opened sharply lower and the dollar tumbled Monday amid further concerns about the credit crisis following the decision by the Federal Reserve to cut its discount rate overnight and the move by JP Morgan to acquire its troubled peer Bear Stearns.
"The release of these two messages so close together will do little to help restore any confidence in the U.S. economy and, with further rate cuts still expected at the FOMC tomorrow, the outlook is certainly grim," said Claire Collingwood, a trader at spreadbettor CMC Markets.
At 0820 GMT, the U.K.'s FTSE 100 index stood 95 points lower at 5537.0, France's CAC-40 index was down 102 points at 4489.8, and Germany's DAX index was 179 points lower at 6271.48.
The Fed, in an unusual weekend move, cut its discount rate, the rate it lends to financial institutions at, to 3.25% from 3.5% Sunday, while also creating another lending facility for large investment banks to secure short-term loans.
These actions were aimed at providing "greater assurance" to financial institutions about their access to funds in the wake of the collapse of Bear Stearns, Fed Chairman Ben Bernanke said Sunday.
This follows the news investment bank Bear Stearns was forced to sell itself to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
Fears about the credit crisis also dominated Asian trading overnight, with Japan's benchmark Nikkei 225 index plunging 3.7% to 11,787.51. Markets in Hong Kong, South Korea, India and Australia also dropped sharply.
Investors will later focus upon the open of business on Wall Street, and this will "doubtless add to the volatile nature of the day's trading", added Collingwood.
Front-month Standard & Poor's futures currently stand about 1.8% lower at 1270.10 Monday, with the DJIA equivalent down 1.4% at 11,817.
The Fed's actions have also had a substantial impact on the foreign exchange markets, with the dollar very much out of fashion as investors shun anything remotely associated with risk.
The dollar sank in Asia to a new record low against the euro, at $1.5905, a record low against the Swiss franc, at CHF0.9572, and a 12-year low against the Japanese yen, at Y95.77.
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The uncertainty surrounding the U.S. economy, the world's largest, has resulted in a strong flight to quality, with U.S. Treasurys in demand.
This has resulted in the yields on two- and five-year notes falling to levels last seen in 2003, while there has been demand for 30-year bonds.
And following the cut in the Fed's discount rate Sunday, the market is now looking for a cut in the Fed funds rate by 100 bps to 2.0%. According to Fed fund futures, the chances of a 100 bps cut are currently priced at around 96%.
Benefitting from the dollar's weakness, and tumbling stock markets, has been the price of crude oil, with Nymex April crude hitting a new record high of $111.80/bbl in Asian trade.
"Continued gloomy economic news, the prospects for further monetary easing, and a lack of viable alternative investment outlets suggest continued inflows into crude markets," said analysts at PFC Energy.
At 0820 GMT, the Nymex April crude contract stood $1.14 a barrel higher at $111.37/bbl.
Gold has also showed more strength, and the precious metal will continue to rise as the U.S. economy continues to "fail" and the Fed agenda is to prop it up by lowering interest rates, said Thomas Winmill, manager of New York-based Midas Fund.
Also adding to an environment of lower interest rates and thus a weaker U.S. dollar, there are concerns about inflation, which makes gold's rise more fundamentally based, said Winmill.
At 0830 GMT, spot gold traded at $1023.50 a troy ounce, just off a new record high of $1033/oz seen earlier Monday.
-By Peter Nurse,
Dow Jones Newswires
March 17, 2008 04:38 ET (08:38 GMT)
Copyright 2008 Dow Jones & Company, Inc.
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