Markets price in Fed US rate cut

The US dollar was battered against the UK pound and hit fresh lows against the euro as investors bet the Fed will cut rates from 4.75%.

This would follow the Fed's bold move in September when it chopped rates from 5.25% - the first cut in four years.

It is hoped lower interest rates would help spur on the stuttering US economy.

Many analysts had been tipping another interest rate reduction since the Fed's dramatic intervention to stabilise financial markets in September in a desperate effort to limit the economic damage caused by a deepening slump in the housing market.

Investment banks on both sides of the Atlantic, most notably Merrill Lynch, have been painfully affected by sour investments linked to sub-prime mortgages in the US, which have added to market uncertainty.

Dollar decline

The widely held belief that further rate cuts would be needed to prevent the world's largest economy from slipping into a recession has sent the dollar into a tailspin, sinking against the pound to values not seen since 1981, and hitting daily record lows against the euro.

This is caused by investors selling dollar-denominated assets to search for better rates of return elsewhere.

Shares on Wall Street also fell, tracking declines in European markets, as investors became cautious and took profits from recent gains.

The Dow Jones index of largest stocks declined 77.8 points, or 0.56%, to end at 13,792.5.

Sliver of doubt

Earlier the dollar had rallied briefly after the Wall Street Journal put a cat among the pigeons with an article suggesting that a rate cut was "no sure thing".

The newspaper's journalist, Greg Ip, who is known for his sometime canny insights into the Fed's operations, argued that while the housing market problems had deepened, he saw little evidence of a spillover into the wider economy.

In fact, he said, the certainty in a rate cut decision was most likely a key factor at the Fed's two-day meeting with the consequences of upsetting the "fragile" financial markets potentially more damaging.

But this sliver of doubt was largely ignored by analysts after figures released by The Conference Board showed US consumer confidence had fallen for the third month in a row in October to its lowest level in two years.

It declined amid fears that business conditions were weakening, which would have a negative impact on jobs.

Overriding worry

News that shoppers in the world's largest economy are tightening their purse strings fuelled concerns about consumer spending in the crucial Christmas period.

With spending accounting for two thirds of national economic growth, analysts say this will be the overriding worry for the Fed, along with the risk that harder-to-access credit could also hurt business investment and cause further pain in the housing market.

New and used homes are at record lows as lenders tighten up on who they will give mortgages to.

And up to two million US families - especially those with sub-prime mortgages - could eventually lose their homes as the credit crunch intensifies, a Congressional committee report said last week.

There has been much debate over how much the Fed could cut rates by, with some analysts suggesting that another bold move was needed to get the economy firing on all cylinders, perhaps reducing rates to 4.25%.

Others are more cautious, pointing to the risks of stoking inflation by making borrowing costs cheap again and promoting a return to conditions that led to a boom-and-bust cycle in the property market.

Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. said: "At this point, it seems a cut of one-quarter point will be ordered as an insurance policy."

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