A 0.50% rate cut could trigger an immediate dollar rally, but hints over quantative easing are liable to more than offset this with a net weaker dollar tone.

The Euro pushed higher in European trading on Monday and retained a firmer tone throughout the day as the dollar remained under some selling pressure. The US economic data failed to have a major impact, although it reinforced underlying fears.

The New York manufacturing PMI index edged lower to -25.8 in December from -25.4 previously which suggested that the industrial sector will remain under pressure while industrial production fell by 0.6% in November.

The latest capital flows report, recorded a decline in long-term inflows to US$1.5bn in October from US$65.4bn previously while the severe dislocation in markets following the Lehman collapse was illustrated by the US$286.3bn in total inflows.

Ahead of the FOMC interest rate decision on Tuesday, markets continued to expect a further rate reduction of 0.50% to 0.50%, while there has been further speculation that the Fed would look to maintain downward pressure on mortgage rates and could also buy Treasury bonds which would unsettle investors. There was evidence of a decline in demand for the US currency as the 3-month Libor rate continued the decline seen over the past week with a fall to 1.87% at the latest fixing.

The dollar corrected stronger in European on Tuesday with a move to 1.3650.