The Federal Reserve rate decision will trigger renewed volatility later on Tuesday with the yen gaining initially if the cut is lower than expected.

The dollar strengthened back to highs just beyond 1.57 against the Euro on Monday from lows around 1.59, but underlying sentiment remained very negative as fears continued to dominate.

The US growth-related data remained very weak with industrial production falling 0.5% in February while the New York manufacturing index fell to a record low of -22.2 from -11.7 the previous month.

Given the financial and economic risks, there will be further speculation that the Federal Reserve will cut interest rates by at least a full 1.0% at Tuesday’s FOMC meeting. Indeed, there is some market speculation that the cut could be even larger than this.

A very aggressive rate cut would reinforce the dollar’s lack of yield support, but the measure could draw in longer-term capital on hopes of an economic recovery. The dollar will also gain support if there are co-ordinated moves to lower interest rates. The overall financial risks will remain high and quarterly results from the major investment banks will be under close scrutiny.