The euro and British pound both fell against the U.S. dollar Thursday after the Bank of England and the European Central Bank each cut interest rates to record lows.
The greenback also gained from safe-haven buying, as the Dow Jones Industrial Average fell 111 points, or 1.7%, to 6,764 in opening trades.
The dollar index which measures the currency against a trade-weighted basket of six global counterparts, rose to 89.17, compared with 88.493 in late North American trading Wednesday.
The euro fell 1% to $1.2525 after the ECB announced the cut to its key lending rate to 1.5% from 2%. The currency hit an intraday low of $1.2479.
The British pound dropped 0.7% to $1.4083 after the Bank of England's cut of 50 basis points to put its benchmark rate at 0.5%.
"Even though the rate announcements were negative for both currencies, the euro has sold off more aggressively than the British pound because ECB President [Jean-Claude] Trichet warned that growth will be significantly reduced in 2009 and 2010, while inflation will remain well below 2%," said Kathy Lien, director of currency research at GFT.
"More importantly, he admitted that the ECB is studying non-standard measures, which include quantitative easing," Lien said in a research note.
The dollar fell 0.3% against the Japanese yen Thursday to 98.79 yen.
Sharp contraction seen in euro area
For the U.S. dollar, British pound and Japanese yen, no surprises are expected from future rate decisions, Lien said.
The three currencies' central banks have already cut their respective policy rates to near zero.
In contrast, further rate cuts from the ECB are possible, and the uncertainty of whether the ECB will adopt credit easing should keep the euro under pressure against the greenback, she said.
Annual real gross domestic product in the euro area is expected to contract between 2.2% and 3.2% in 2009, while in 2010, growth is predicted to range between negative 0.7% and positive 0.7%, according to the latest ECB staff macroeconomic projections, released Thursday.
The ranges represent a downward revision of those made in December.
Economists at Danske Bank expected the ECB to revise its forecast for 2009 gross domestic product to show a 2% contraction.
GDP across the euro zone saw a 1.5% quarterly decline in the final three months of 2008, the statistical agency Eurostat reported Thursday, unrevised from a preliminary estimate. The decline was the steepest since records began in 1995.
Compared to the final quarter of 2007, GDP shrank 1.3%, revised from an earlier estimate of a 1.2% fall, the statistical agency said.
British quantitative easing
In the U.K., the central bank also announced a program of "quantitative easing" on Thursday.
The Bank of England said it would buy a total of 75 billion pounds in assets over the next three months. The majority of purchases will be government bonds, or gilts, of medium to long maturity.
The news sent gilt prices soaring, particularly at the long end.
"Quantitative easing is negative for a currency, but if the BOE is done cutting interest rates, further weakness in the British pound may be limited," Lien said.
Meanwhile, hopes for a major increase in China's economic rescue plan were deflated Thursday, as Premier Wen Jiabao pledged to bolster the economy and increase outlays on social programs, but offered little more in terms of changes to the government's earlier-announced $585 billion stimulus package. See full story on Chinese stimulus.
Hopes that Wen would outline a significant increase in Beijing's stimulus plans had helped boost global equity markets Wednesday.
