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Currencies: Dollar Slips Against Yen and Euro as FOMC Convenes

An anxious market is trading light as the

Federal Open Market Committee, the policy-making arm of the

Federal Reserve, convenes today.

The FOMC is expected to cut interest rates by 50 basis points at the conclusion of its meeting tomorrow, after having surprised investors with a 50 basis-point intermeeting cut on Jan. 3.

According to James McCormick, currency strategist at

J.P. Morgan Chase

, "The markets are so aggressively pricing in a 50 basis-point cut" that there will be little movement at the meeting's end. He foresees an upside move in euro/dollar trading if and when the Fed announces the expected rate cut.

"The Fed will hit the law of diminishing returns soon," McCormick said, referring to the next round of rate cuts. While the first round of cuts had significant effect in boosting the equity and currency markets, McCormick expects less of an impact in each subsequent move.

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McCormick noted that there is a "tug of war between the downside risk

of a slowing economy and the belief that the Fed has it under control." He added that while the rate cut earlier this month indicates that the Fed has the economy under control, any further weak data would shift sentiment back to slowdown worries, rather than optimism that the U.S. is back on the upswing.

The euro was recently gaining slightly on the dollar, trading at $0.9188, up from yesterday's close of $0.9162.

Better-than expected industrial production data out of Japan yesterday sent the yen moving upward against the euro and the dollar, but "the euro is the obvious trade off of the FOMC meeting," said McCormick.

"You've had quite a few numbers out of Japan and can look at them as a bit better than expected," McCormick said. The yen continues to firm this morning, gaining just marginally on the dollar. The dollar was recently trading for 116.67 yen, down from 116.77 at yesterday's close.

The yen is falling to the euro today on euro strength. The euro was recently at 107.19 yen, up from 106.95 at the close of trading yesterday.

The dollar is losing value to the rest of the usual suspects today. The British pound is up on the dollar, trading for $1.4596 from $1.4580 yesterday. The Australian dollar is firming against the U.S. currency also, trading for $0.5445, up from $0.5429 at yesterday's close of trading.

The Canadian dollar is going against the pack this morning, losing value to the U.S. currency. The U.S. dollar is up just marginally on the Canadian dollar, with the U.S. dollar trading for C$1.5008, up from $1.5005 at yesterday's close.

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