The dollar lost ground on Wednesday after the Federal Reserve delivered a cut in US interest rates at its policy meeting.

Following last week’s emergency 75 basis-point cut, the central bank lowered its Fed funds rate by 50 basis points to 3 per cent.

The Fed said it took the action because downside risks to the economy remained and that it expected inflation to moderate in the coming quarters.

The central bank added that it “would act in a timely manner” to deal with those risks.

By mid-afternoon in New York, the dollar fell 0.6 per cent to $1.4865 against the euro to $1.4865, lost 0.1 per cent to $1.9910 against the pound and eased 0.5 per cent to SFr1.0885 against the Swiss franc.

The dollar advanced 0.2 per cent to Y107.30 against the yen, however, as the Fed’s dovish statement boosted risk appetite, weighing on demand for the low-yielding Japanese currency.

Meanwhile, sterling lost ground as more dire news from the UK housing sector put a halt to the rally in the pound that started at the end of last week.

Data showed December UK mortgage approvals sank to the lowest level since records began in 1999, heightening expectations that the Bank of England would lower interest rates at its policy meeting next week.

However, analysts said the re-appointment of Mervyn King as governor of the Bank of England lessened the chance that the central bank would follow the Federal Reserve with a series of aggressive rate cuts.

Jonathan Loynes at Capital Economics said the news was a possibly hawkish development for UK interest rates, given Mr King’s voting record at the Bank of England’s monetary policy meetings. “With Mr King still at the helm, interest rates may fall less quickly in the current economic slowdown than they might under a different governor,” he said.

The pound fell 0.5 per cent to £0.7460 against the euro.

The South African rand dropped 1.6 per cent to R7.3050 against the dollar after inflation came in higher than expected in December.

Analysts said supply constraints, which saw power cuts cripple the country’s mining industry for five days, should keep energy prices elevated.

Indeed, they said the energy problem would also complicate the country’s investment drive towards the 2010 football World Cup.

“Suffice to say that a lot more power is soon to be required for construction and related activity,” said Alina Anishchanka at UBS.

She added that the prospects for foreign investors looked less attractive, while the financing of the current account deficit looked more vulnerable. “We continue to see the need to hedge the downside in the South African rand.”