Global equities rallied on Wednesday after an aggressive U.S. rate cut allayed fears that a credit crunch which has plagued markets could drag the U.S. economy into recession, but the dollar suffered a blow.

The dollar struck a 15-year low against a basket of currencies after the Fed rate cut eroded the yield appeal of the U.S. currency. The weakness of the dollar pushed gold prices to 16-month highs.

The question for investors now is whether the Federal Reserve's bigger-than-expected 50 basis point rate cut to 4.75 percent is merely a relief measure for markets grappling with a liquidity squeeze or the beginning of a new monetary strategy.

(The Fed) will be looking very closely at the macro and micro data including earnings statements from the banks, and we wouldn't rule out two more cuts by the end of the year, said AXA Investment Managers strategist Franz Wenzel.

Fed fund rates are discounting at least another 25 basis point cut by the end of the year and a Reuters poll taken after the rate decision showed 12 out of 18 primary dealers expect a quarter-point rate cut in October.

But losses in 10-year U.S. Treasury prices suggested bond investors were already worried that in an attempt to shield the world's largest economy from the recent turmoil, the Fed could be shying away from its vigilance against inflation.

Against this background, investors will pore through U.S. consumer prices data due at 1230 GMT. U.S. housing starts and permits for August due at the same time will also be in focus as investors seek insight into the state of the housing market.

This was where all the trouble started in July, when a rise in risky loan defaults dragged the U.S. subprime mortgage market into crisis, sapping liquidity and investor confidence.

Since then various major central banks have injected extra cash into the banking system to keep operations running smoothly but the move by the Fed was the most significant yet and a great relief to stocks globally.

Earlier on Wednesday, the Bank of Japan kept rates unchanged as expected at 0.50 percent.


Oil prices hovered around Tuesday's record-high above $82 a barrel with interest rate cuts typically seen boosting economic growth and by extension appetite for commodities.

The FTSEurofirst 300 index hit a two-week high and traded up 2.1 percent at 1,541.1 after U.S. stocks jumped the most in four years on Tuesday.

But some in the market remained skeptical.

This might mean an early Christmas for markets but could turn out to be a short one, said an equities trader.

The Fed's main aim was to help sentiment and calm the market and it certainly looks to have done that. The Fed normally doesn't cut aggressively. So, the flip side is there might be something sinister under the surface and some might view this negatively.

Stocks' fortunes had improved even before the Fed rate decision on Tuesday after investment bank Lehman Brothers beat earnings forecasts, helping soothe worries about the impact of credit market contraction on banks.

Next up are results from Morgan Stanley later in the day and Bear Stearns and Goldman Sachs on Thursday.

(Additional Reporting by Sitaraman Shankar and Anshuman Daga)