Investors weighed up today the prospects of a near-term US rate cut to calm a financial storm stemming from America's faltering home loan sector, as the European Central Bank moved to soothe money markets again.
Indicating liquidity problems were far from over, the ECB said it would hold a tender to add €40 billion in 91-day funds to the euro money market tomorrow - "a technical measure aimed at supporting the normalisation" of the market.
In a statement, the ECB said its monetary policy stance was expressed by President Jean-Claude Trichet on August 2nd, suggesting it had not changed its plans for interest rates.
"Including that sentence suggests to us that the council continues to view the chances of a rate increase in September as high," said Jacques Cailloux, economist at RBS.
US shares rose on hopes of a Federal Reserve rate cut but there were mixed messages about its intentions, following last week's half-point cut in the rate which governs its loans to banks, a move which helped battered stock markets stabilise.
Speculation the Fed might cut its benchmark interest rate soon was fired by Senator Christopher Dodd, chairman of the US Senate Banking Committee, who said Fed Chairman Ben Bernanke had told him he would use "all available tools" to calm the markets.
Dodd met Bernanke and US Treasury Secretary Henry Paulson yesterday to discuss market turmoil.
But nothing was heard from Bernanke himself and Richmond Federal Reserve Bank President Jeffrey Lacker dampened hopes for an imminent rate cut. "Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view," he said.
US stock investors appeared to be discounting a Fed cut - the Dow Jones Industrial Average was up 105.60 points, or 0.81 per cent, at 13,196.46, shortly after the open.
The Wall Street Journal reported on Wednesday that Fed officials were cautiously optimistic the steps they have taken to relieve a squeeze in credit markets were working and may wait until their next policy meeting before considering a rate cut.
Market speculation has been feverish that the US central bank could cut its fed funds rate before its regular meeting.