March 18 (Bloomberg) -- The dollar surged the most in nine years against the yen and gained against the euro after the Federal Reserve cut interest rates by 0.75 percentage point in a bid to boost the economy and confidence in financial markets.

The U.S. currency's advance started earlier against the yen after stocks rallied on stronger-than-forecast earnings from Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. The dollar also snapped a four-day slump against the euro as the reduction was smaller than the full-point cut many traders anticipated, increasing the appeal of deposits in the currency.

``The final verdict is the Fed's move is positive for risky assets,'' said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs. ``Concerns of a potential systemic failure diminished; that clearly removed one specific negative factor for the dollar.''

The dollar rose 2.5 percent to 99.75 yen at 4:41 p.m. in New York, from 97.33 late yesterday, the biggest gain since January 1999. The currency touched the lowest since August 1995 yesterday after the fire sale of Bear Stearns Cos. The U.S. currency advanced to $1.5628 per euro from $1.5729 yesterday, when it reached $1.5903, the weakest level since the euro's debut in 1999. The yen fell to 155.80 per euro from 153.07.

The yen sank against all of the 16 most-traded currencies, dropping more than 4.5 percent versus Brazil's real, as traders put on carry-trade bets funded by loans in Japan.

`Less Negative' Differential

Today's cut ``should help to promote moderate growth over time and to mitigate the risks to economic activity,'' the Fed said in a statement. ``Downside risks to growth remain.''

The reduction to 2.25 percent matched the median forecast in a Bloomberg News survey. Futures showed that almost 90 percent of traders were betting on a cut of a full point today. The euro region's main rate is at a six-year high of 4 percent.

The ``interest-rate differential is less negative for the dollar,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``The currency market had completely discounted'' a full-point cut.

Two policy makers dissented in favor of ``less aggressive action.'' Officials also showed renewed concern about inflation.

The U.S. currency has lost 15 percent against the yen and euro in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate six times since September to avert a recession.

`Positions Got Squeezed'

The dollar's gains versus the yen began in earlier trading as U.S. stocks rallied on the earnings from Goldman and Lehman Brothers.

After JPMorgan Chase & Co. agreed to buy Bear Stearns on March 16 and the Fed conducted an emergency discount-rate cut, traders had set up bets that the Fed would cut a full point today and signal further reductions ahead, sinking the dollar.

``A lot of short dollar positions got squeezed after the Fed disappointed the markets'' by cutting 0.75 point, said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``Basically they are saying a move of 75 basis points, or 50 basis points each time is less likely.''

The Standard & Poor's 500 Index soared 4.2 percent, while stocks in Asia and Europe also advanced, encouraging traders to buy higher-yielding assets financed with loans in yen.

``The Fed is trying to save some bullets for the future,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``The market got carried away'' by expectations of a bigger rate cut, he said.

Fed Delivers

Goldman, the world's biggest securities firm by market value, reported a smaller-than-estimated 53 percent drop in first-quarter profit. Lehman Brothers reported its smallest quarterly profit since 2003, yet still beat analysts' estimates.

The yen lost 2.9 percent against the pound and 3 percent versus the New Zealand dollar. The Swiss franc, also used to fund carry trades, fell against major currencies. Benchmark rates are 2.75 percent in Switzerland, 5.25 percent in the U.K., 7.25 percent in Australia and 8.25 percent in New Zealand.

``The Fed delivered the minimum to appease the overriding concerns of the market right now,'' said Mike Moran, a senior currency strategist at Standard Chartered in New York. ``Risk sentiment is a little better.''

After holding in a range since November of about $1.43 to $1.49, the dollar began to slide after Fed Vice Chairman Donald Kohn said Feb. 26 that credit-market turmoil and slower growth pose a ``greater threat'' than inflation. The dollar fell to record lows against the euro on each of the past five trading days amid concern that losses from credit markets may erode the capital of Wall Street firms.

The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, fell to 70.698 yesterday, the lowest since it started in 1973.

The pound rose to $2.0053, from $1.999, after a government report showed inflation accelerated to a nine-month high in February, limiting the Bank of England's scope to cut rates.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net

Last Updated: March 18, 2008 16:46 EDT