Fears of US interest rate cut hurts dollar

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DIANE COYLE

Economics Correspondent

A drop in industrial output for the first time in six months fanned hopes of an early cut in US interest rates, even though the Federal Reserve took no action after its policy meeting yesterday.

The mood of optimism among investors pushed the Dow jones Industrial Average above 4,900 for the first time, to a record close of 4,922.75, up 51 points.

The prospect of lower interest rates in Europe as well as in the US took European bonds and shares higher yesterday. The biggest advances were in France, where the government announced a far tougher-than- expected supplementary budget, which could allow an easing in interest rates.

German markets also reacted to a fall in the Bundesbank's repo rate by two basis points to 3.98 per cent, hinting at further cuts in key interest rates. The Bundesbank council meets today but is not expected to act immediately.

Interest rate expectations, along with uncertainty over the outcome of the stalemate between President Bill Clinton and Congress over the budget, weakened the dollar yesterday. Investors are worried about the danger of a default on US government debt.

David Bloom, US economist for brokers James Capel, said: "There is a growing risk that the two sides will turn the budget into an election issue."

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