Dollar jumps on European rate cut talk

European Central Bank holds rates

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NEW YORK (CNNMoney.com) -- The U.S. dollar rallied Thursday amid speculation that the European Central Bank may need to lower interest rates soon and ongoing uncertainty about the future of the U.S. government's bailout plan.

The 15-nation currency bought $1.3818 at 5:00 p.m. ET in New York, down from $1.3977 late Wednesday.

Great Britain's pound slid to $1.7636, from $1.7711. And the greenback was quoted at ¥105.31, down from ¥105.85.

In a widely expected move, the ECB decided to hold its benchmark interest rate at 4.25%. But the central bank's president, Jean-Claude Trichet, said the European economy faces "increased downside risks," suggesting that an interest rate cut may be in the cards.

In prepared remarks, Trichet said "ongoing financial market tensions," could impact Europe's economy "more adversely than currently foreseen."

Until now, the ECB has been primarily concerned with combating inflation and has strongly resisted lowering interest rates.

However, a number of big European banks and mortgage lenders have recently been nationalized as the financial turmoil plaguing Wall Street appears to be spreading across the Atlantic.

"It sounds like Trichet is preparing the market for a rate cut," said Kevin Chau, foreign currency analyst at IDEAGlobal.

While lower interest rates can boost economic activity, they can also drive up inflation, which devalues a nation's currency.

Bailout uncertainty: The currency market is also awaiting a final decision on the government's proposed intervention in the financial system.

Senate lawmakers passed a modified version of the bailout plan Wednesday night, which was rejected by the House on Monday.

The bill will go before the House again on Friday.

However, even before the government finalizes the plan, many investors are expressing doubts that it will be sufficient to restore the economy's health.

"The market is coming to realization that even with the passage of a bill, we will still have economic problems," Chau said.