The hints from Fed Chairman Bernanke over the potential for a further aggressive interest rate cut will keep the dollar on the defensive in the short term

The dollar was unable to sustain gains below 1.4650 against the Euro on Thursday and weakened sharply after contrasting remarks from Federal Reserve and ECB officials. The dollar dropped to lows beyond 1.48 and remained weak on Friday.

As expected, the ECB left interest rates on hold at 4.00% following the latest council meeting with Trichet taking a firm stance in the press conference following the decision.

In contrast, US Federal Reserve Chairman Bernanke, stated that further interest rate cuts may be required while the central bank was ready to take substantive action if required. The comments will reinforce market expectations that the Fed will sanction a 0.50% rate cut in late January and this will tend to undermine the dollar in the short term.

Some caution is required as there are a wide range of views within the Fed and there could be strong opposition to a 0.50% cut. Hoenig, for example, was more cautious over the need for further rate cuts, although he will not be a voting member in January.