The Federal Reserve has officially run out of room to cut interest rates. For the first time since August 2007, they left interest rates unchanged at a target range of 0 to 0.25 percent. The dollar rallied because the Fed did the minimum of what was needed to pacify the market, which was to say that they could purchases Treasuries but are not going to do so right now. Currency traders were looking for something more radical such as inflation targeting or a bold announcement that they start buying long term Treasuries in size - which would have been dollar bearish. Interest rates could remain at current levels for the next six months as the central bank focuses on credit easing. The Federal Reserve was pessimistic about the outlook for the US economy and said that inflation could continue to remain weak in the coming quarters.

Euro, pound and Aussies were all higher at the start of European trade boosted by improved sentiment towards risk as equity markets across the region rallied by more than 1.5% starting the third day of the week on a somewhat brighter note. Part of the reason for today’s optimism has to do with reports that President Obama’s stimulus plan has a provision to establish a “bad bank” that would acquire up to $1 Trillion worth of toxic US assets.