The dollar rebounded from a four-month low on Wednesday, rallying against sterling after the Bank of England said it expects anaemic UK inflation and the economy to recover more slowly than previously thought. The BoE's quarterly inflation report took the wind out of stocks' sails, sending bank shares down 4 percent and sparking a wave of profit-taking from sterling's recent rally that culminated in a four-month high against the dollar on Tuesday. The dollar had earlier fallen to fresh lows after an article in the Financial Times flagged the risk of the United States losing its top sovereign credit rating. But the BoE report and subsequent comments from Governor Mervyn King triggered a rebound. "The overall picture is quite sterling negative. It's more the recovery profile, which is way too optimistic," said Ian Stannard, senior currency strategist at BNP Paribas in London. "(King) was quite pessimistic, and he's probably right to be." British inflation will fall to as low as 0.5 percent before recovering to just above 1 percent in two years, and the economy will shrink on an annual basis by as much as 4.5 percent at the start of the second quarter this year before recovering more slowly than previously thought. Some analysts took King's comments that he was pleased with the initial impact of quantitative easing on UK government bond yields as a suggestion that he may also consider sterling weakness as an inevitable side effect of QE, which put the pound under selling pressure. At 1114 GMT sterling was down 0.8 percent on the day at $1.5148, nearly two cents from levels just before the BoE report was published. The dollar index .DXY, which measures its performance against a basket of six currencies, was last flat on the day at 82.32, having earlier hit a four-month low of 81.871. The euro was up 0.1 percent at $1.3654, retreating from a seven-week high of $1.3722 on trading platform EBS.

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