By: Tom Wyle - Editor
Posted 9/11/07 - The pound rose against a weaker dollar and against the yen on Tuesday, as the markets tried to work out whether a US interest rate cut was on the cards.
The dollar remained close to its all-time low against the euro after Federal Reserve chairman Ben Bernanke failed to give markets any further guidance on whether and by how-much the Federal Reserve will cut US interest rates next week.
In a speech in Berlin, Bernanke chose instead to discuss the US's large current account deficit - saying it cannot go indefinitely but is not currently a large drain on the US economy.
Market participants had been hoping Bernanke would give some indication of whether the Fed would cut its key Fed funds rate. However his silence on the matter has left most markets unchanged in their view that rates will go down.
"The fact that he's not said anything is taken by the markets as validating their expectation that the Fed is going to start cutting rates aggressively," said Gavin Friend, currency strategist at Commerzbank.
Most market participants had already priced in a quarter point reduction in the benchmark Fed funds rate, to 5.00 percent, to rein in the effects of the credit crunch on the wider US economy, but last week's disappointing jobs report for August raised the prospect that the Fed may be more aggressive on Sept 18 and cut by 50 basis points. This in turn has pushed the dollar lower against the euro.
Elsewhere, the pound slipped against the euro.
Comments from European Central Bank President Jean-Claude Trichet that inflation risks remain to the upside helped the euro maintain support.
"The incoming macroeconomic data confirmed that risks to price stability remain on the upside over the medium term," he said, reiterating that the ECB's monetary policy stance "is still on the accommodative side".
Though he is no longer signaling "strong vigilance" on inflation risks -- a key phrase used for upcoming rate hikes-- analysts said Trichet still painted a picture where borrowing costs could potentially rise again.
"His comments have reinforced the markets' view that the ECB still wants to raise rates and it will do if market conditions allow them to," said Friend at Commerzbank.