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Dollar sinks after ECB rate cut surprise

It has been well known in the market for some time that the ECB (European Central Bank) was looking to cut European interest rates. However, today's announcement of a quarter point cut, to 1.25%, has shocked many with the vast majority of analysts expecting a half point cut. The result was an increase in European currencies and a weakening of the dollar on currency exchange markets. The situation was also impacted by disappointing economic data from the US indicating rising employment and more loan write-offs on the way.

Sterling was stronger across the board today in light of the ECB move although the multi-trillion dollar finance package announced by the G20 has also impacted upon the outlook for the UK economy. Whether this is a short-term bounce, or a real change in direction, remains to be seen but worldwide economies will not turn around overnight and this will be a long haul no matter what many expect.

There is a debate raging as to why the ECB only cut rates by a quarter of a percent with suggestions that they are "leaving the door open" to further cuts in due course or looking at unconventional economic policies, such as quantitative easing. The next few weeks are vital and we should see more indications of what exactly is going on and what we can expect.

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