Free forex

LONDON (Thomson Financial) - The dollar gained across the board after strong confidence data, despite treading water for some time after the release, with focus due to shift later to a speech from US President George Bush on tax relief to stimulate the US economy.

The Reuters/University of Michigan index of consumer sentiment rose to 80.5 from 75.5 in December, easily beating economists' forecasts for a further decline to 74.7.

Marc Ostwald at Insinger de Beaufort said the improvement may simply reflect consumers' happiness that the government appears to be taking action, as well as the fact their mortgage bills have dropped because the Fed has cut rates to 4.25 pct, from 5.25 pct in September.

"A fall in mortgage rates and talk of tax cuts can go a long way to dispelling financial markets' gloom and doom," he said.

The economy's underlying problems appear to remain severe, however, and economists expect the Fed to cut by a further 50 basis points in February as bad news flows unabated about house prices and investment banking losses.

Later today markets will look for details from President Bush about fiscal plans to stimulate the US economy.

Bush is expected to speak at 1650 GMT to discuss a plan to stimulate the economy through tax rebates and other strategies.

Treasury Secretary Henry Paulson has said he is confident a temporary stimulus package can be agreed upon quickly, while Federal Reserve chairman Ben Bernanke has also expressed support for temporary tax relief.

Analysts say investors will want to be convinced the plan will help prop up US consumption, if markets are to pick up anytime soon.

Elsewhere, the pound remained under pressure as weak UK retail sales figures boosted market expectations that UK interest rates will fall in February.

Retail sales fell 0.4 pct on the month in December, worse than analyst forecasts for no change.

"The pound looks increasingly weighed down by a growing assuredness -- underpinned by a poor December retail sales report and ongoing concern for the banking sector -- that the Bank of England will be obligated to meet the growing malaise with a cut in interest rates in February," said Neil Mellor, currency analyst at Bank of New York.

The euro's direction was largely determined by news on the pound and dollar but on a longer-term basis, its storming run of recent weeks looks to be ebbing away as signs emerge that the European Central Bank could shift to a looser monetary stance in the coming months.

Yves Mersch, head of the central bank of Luxembourg, gave the first signs of a possible shift this week, when he said the ECB could "look through" current inflation conditions to growth dangers ahead.

"Mersch's comments suggested that the ECB is not completely immune to the weak news on activity and added some support to our view - increasingly shared by the markets - that it will cut interest rates later this year," said economists at Capital Economics.