Sterling work: us rate cut boosts pound
In the wake of the historic interest rate cuts in the US yesterday, the pound has risen against the dollar and it looks set to stay that way...
Yesterday, Tuesday December 16th, the US Federal Reserve slashed interest rates to between 0 and 0.25 per cent in a bid to stave off a prolonged US slump.
The Federal Reserve's decision flew in the face of monetary policy-making, and they said that it would ‘no longer set an explicit target for US interest rates' and instead set a range and it said it would be ‘happy to see rates at zero.'
Markets had expected the Fed to cut rates from their already historically low level of one per cent, but instead of stopping at 0.5 per cent, as most forecasters had predicted, it said it would target a federal funds rate in a range of zero to 0.25 per cent.
Following the groundbreaking cut, the sterling rose as high as 1.57 against the dollar and the Dow Jones index rose by 4.2 per cent by the end of the day's trading.
This rise followed a comment from the Federal Reserve's open market committee, (FOMC) in which they said that they expected to keep rates ‘exceptionally low' for some considerable time.
These measures were all linked to the dire financial situation that continues to rage on in America.
Earlier in the day, Government data showed inflation plummeting as the US economy's recession deepens.
The consumer price index fell 1.7 per cent in November, on top of a one per cent drop in October, back-to-back records since the Labour department began compiling data in 1947.
Meanwhile, according to the Independent newspaper, the Commerce Department said the construction of new houses dropped 18.9 per cent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.
According to the National Bureau of Economic Research, the US has been in recession since December of last year.
Federal Reserve Chairman Ben Bernanke and his colleagues pledged to use ‘all available tools' as they struggle to contain the worst financial crisis since the 1930s.
Pound for pound
The cut in US interest rates has boosted the pound, and, although it eased back later in the day following its meteoric rise, it still stands at more than 10 cents above the six-and-a-half-year low below 1.45 seen earlier this month when the Bank of England cut UK rates to two per cent - equalling the all-time record low.
But despite relief against the dollar, holidaymakers to Europe face no respite as the pound fell to a new all-time low below 1.11 euros overnight.
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