LONDON (AFP) — The dollar crept higher against the euro on Wednesday, clawing back losses from the previous day, as dealers digested an unexpected and steep rate cut from the US Federal Reserve.
The greenback had taken a serious drubbing against the euro on Tuesday because the interest rate cut took US borrowing costs below those in the eurozone -- making the euro was a more attractive asset for currency investors.
In European trade on Wednesday, the euro sank to 1.4594 dollars, down from 1.4628 dollars in New York late on Tuesday.
The dollar eased to 106.14 yen from 106.45 yen late Tuesday.
"There is nothing much on the US data calendar today (Wednesday) so markets will continue to digest the move with a focus on whether other central banks will follow the Fed's lead," said Calyon economist Stuart Bennett.
He added that "the widening interest rate differential between the US and the rest of the world points ... to a soft dollar outlook at least in the short term."
The US central bank slashed American borrowing costs on Tuesday by three quarters of a point to 3.50 percent to help ward off a recession.
The Fed funds rate is now lower than the European Central Bank's benchmark refi lending rate, which has stood at 4.0 percent since June.
Meanwhile, ECB President Jean-Claude Trichet appeared to pour cold water on the prospect of a interest rate cut in the eurozone.
Trichet gave a strong hint Wednesday that a eurozone interest rate cut was not in the works as he vowed to fight inflation, despite a major stock market correction that sparked a surprise US interest rate cut on Tuesday.
"I trust that in all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations," he said.
"Also important is for the central bank to ensure an orderly functioning of the money markets at the level of interest rates required for anchoring the inflation expectations," he said in a speech before the European Parliament.
"It is what the ECB has been doing since the beginning of the turbulences, namely since the beginning of August last year," Trichet added.
With eurozone inflation running at its highest in over six years, the ECB has raised the prospect of lifting its interest rates to keep price growth under control.
Elsewhere, the British pound steadied after the minutes to the Bank of England's last policy meeting showed rate-setters were still very much concerned about inflation despite an expected downturn in growth.
The minutes revealed that the bank's nine-strong Monetary Policy Commmittee voted 8-1 in favour of keeping rates unchanged at 5.50 percent earlier this month.
In European trading on Wednesday, the euro changed hands at 1.4594 dollars against 1.4628 late Tuesday, at 154.90 yen (155.73), 0.7454 pounds (0.7457) and 1.5970 Swiss francs (1.6019).
The dollar stood at 106.14 yen (106.45) and 1.0942 Swiss francs (1.0948).
The pound was at 1.9582 dollars (1.9611).
On the London Bullion Market, the price of gold fell to 862 dollars an ounce from 875 dollars late on Tuesday.
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