Sterling rose against the dollar on Tuesday in a rollercoaster session marked by the Federal Reserve slashing interest rates by 75 basis points in the first inter-meeting move on its main policy rate since the attacks of September 11, 2001.

At 1530 GMT sterling was up almost 1 percent on the day at a session high of $1.9617, bouncing back sharply from a low earlier of $1.9338, a fresh 10-month trough.

Sterling struggled against the euro, however, with the single European currency up half a percent on the day at 74.70 pence.

The Fed cut its fed funds target rate to 3.50 percent from 4.25 percent in an emergency move -- the biggest rate cut in over two decades -- aimed at restoring investor confidence and propping up the creaking U.S. economy.

Financial markets were whipped around in frenzied trading. Sterling traded in a wide range of almost three cents against the dollar and almost a cent against the euro.

Markets remained on edge -- U.S. equities were mired in negative territory and Treasuries were still higher on the day -- but the Fed's rate cut before the Wall Street open helped shore up some of the battered confidence.

European stocks rebounded and government bonds fell. In foreign exchange markets investors were tempted back into so-called carry trades, where low-yielding currencies like the yen are sold for relatively higher-yielding units like sterling.

"Risk aversion has in recent days come to the aid of the dollar. High-yielding currencies have been sold off as investor reduce exposure to riskier assets. However, further aggressive (U.S.) monetary easing will substantially erode any yield support for the dollar and hence we suspect the current risk aversion support for the dollar will give way to the negative yield developments that are now more apparent after this intermeeting cut," said Derek Halpenny, senior currency economist at BTM-UFJ.

UK equities liked the Fed decision, wiping out earlier losses of around 4 percent to near the close of trade up 2 percent

The Bank of England said the Fed's emergency action had no bearing on its scheduled policy meeting the week after next. "There are no plans to bring it forward," a BoE spokeswoman said.

Preliminary data at 0930 GMT on Wednesday is expected to show that UK economic growth cooled in the three months to December to 0.5 percent on the quarter and 2.8 percent annual rate.

Futures markets are pricing in 75-100 basis points of BoE rate cuts by the middle of this year. The BoE's benchmark policy rate is currently 5.5 percent.

Sourced by Reuters.