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The Federal Reserve slashed its discount rate — the interest rate charged on loans to commercial banks — by a half-percentage-point in a bid to increase liquidity in the banking market.

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Traders on the currency market welcomed the move, after a week of turmoil on the financial markets around the world.

‘Looser monetary policy’

"Although the Fed took no action on its benchmark fed funds interest rate target, which remains at 5.25 percent, this cut in the rate at which banks can borrow from the Fed is a sign that policymakers may be moving toward looser monetary policy," says Patrick Fearon, a currency analyst at AG Edwards.

"Therefore, even though the developing global credit crunch will undermine prospects for new interest-rate hikes by the major foreign central banks, US rates now look like they may become less competitive with rates abroad, and that is undermining the dollar," he says.

Analysts say the Fed discount rate cut suggests the central bank will move soon to lower its federal funds rate, which has been at 5.25 percent since June 2006.

"The clear message today is: if the market turmoil continues, they (the Fed) will ease policy to counteract negative fallout on growth," says Patrick Franke at Commerzbank.

The dollar also suffered from a surprisingly low reading in a US consumer confidence survey.

FSTE biggest gain

Britain's top share index posted its biggest one-day gain since early 2003, rebounding dramatically from 11-month lows hit around midday.

Britain's FTSE 100 index ended up 3.5 percent at 6,064.2 points, with banks and commodities the best performing sectors.

The Fed's move, which governs direct Fed loans to banks and is aimed at keeping credit flowing, lifted shares at home and across Europe.

The U.S. subprime crisis has recently spilled over into credit markets hurting stocks and pushing global central banks to inject extra cash into the banking system.

Recently hit bank shares, in particular, found comfort in the Fed's move.

"I am quite confident that the central banks will not allow the world economy to go into recession,” says Edward Menashy, economist at Charles Stanley.

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