LONDON, Sept 19: The euro hovered close to $1.40 on Wednesday in the wake of the US Federal Reserve’s decision to cut American interest rates by a half-point to 4.75 per cent.The European single currency touched earlier on Wednesday the record high level of $1.3988 struck a day earlier after the Fed cut its key rate.

In late European deals on Wednesday the euro had fallen back to $1.3949, against $1.3976 late on Tuesday.

The dollar rose to 116.24 yen, from 116.05 yen.

Elsewhere, gold prices surged to $725.15 per ounce in London as the precious metal was boosted by the weak US dollar and record high oil prices.

The cut in US interest rates undermines the dollar because assets in other countries with higher interest rates become more attractive for investors.

Foreign exchange traders continued to digest the wider impact of the US interest rate cut on Wednesday and eyed new US economic data that suggested economic conditions remained weak.

A survey showed US consumer prices fell by 0.1 per cent in August for the first time since October 2006 as energy prices retreated.

The easing of inflationary pressures vindicated a move by the US central bank on Tuesday to slash its benchmark interest rate for the first time since June 2003 to ease distress in credit markets and cushion the economy from the housing slump.

“The Fed showed clearly its responsibility towards the subprime mortgage problems that have spread across the world,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo.

The inflation figures also suggested further rate moves before the end of the year, on which the markets are speculating.

“With US economic prospects not too bright and problems in the subprime mortgage market expected to continue for some time, there is a strong possibility that the Fed will continue to cut rates,” said Muramatsu.

Although the euro failed to immediately benefit from the inflation figure or another report which showed United States housing starts fell 2.6 per cent in August to their lowest levels in more than a decade, analysts forecast the European single currency would soon pass the $1.40 mark.

Dealers showed little reaction to the Bank of Japan’s announcement that it will leave its key interest rate unchanged at 0.5 per cent for a seventh straight month amid worries about the fallout from credit market turmoil.

The euro was changing hands at $1.3949, against $1.3976 late on Tuesday, 162.14 yen (162.26), 0.6984 pounds (0.6944) and 1.6549 Swiss francs (1.6522).

The dollar stood at 116.24 yen (116.05) and 1.1865 Swiss francs (1.1819).

The pound was being traded at $1.9982 ($2.0128).

On the London Bullion Market, the price of gold soared to $725.15 per ounce, from $714.75 late on Tuesday.—AFP