Sterling strengthened against the sickly dollar on Thursday, taking advantage of the growing sense in financial markets that the Federal Reserve's recent actions to ease credit market strains will not work.

The dollar sank to new lows against the euro, Swiss franc and a basket of currencies, and fell below 100 yen for the first time in 12 years amid the deepening gloom surrounding the health of the financial system and U.S. economy.

Sterling, which benefits from the highest interest rates in the Group of Seven nations, seems poised to benefit from a widening yield advantage as U.S. rates look set to fall further.

At 0920 GMT, the pound was up 0.5 percent on the day at $2.0360 while the euro was down 0.1 percent 76.60 pence.

The pound also shrugged off the first budget from UK finance minister Alistair Darling on Wednesday. It contained no surprises on the growth fromt -- Darling blamed the global credit crisis for having to lower expected growth this year to a range of 1.75-2.25 percent and for 2009 to 2.25-2.75 percent -- but borrowing rose sharply. Darling said inflation would likely rise in the near term.

"Everything is being bought against the dollar. The Bank of England is not going to cut rates any time soon -- they want to cut but can't," said a trader in London, referring to sticky inflation.

"They might cut to 5 percent (from 5.25 percent), but that's it. I see no reason why we can't revisit the $2.11s soon," the trader said, referring to the pound's 26-year high struck in November last year.

A Reuters poll published on Wednesday, however, showed UK rates being cut by 25 basis points in each of the next three quarters, taking them to 4.50 percent by year end.

But the main driver for sterling was the dollar's broad decline after it failed to hold gains sparked by Tuesday's coordinated liquidity injection from the Fed and other central banks to help loosen gummed-up money markets.

Since Friday last week, the Fed has unveiled plans to inject as much as $400 billion of short term funds into money markets, but the initial optimism appears to be fading already.

Sourced by Reuters.