Sterling jumped above $2 for the first time since the recent credit market turmoil this morning as economists have begun to believe that the US will cut rates soon and even cut again before the end of the year.

By 11.20am the pound was at $2.0053. The Yen also strengthened against the dollar after the Japanese central bank kept rates on hold, restoring some confidence in Japanese shares.

A Reuters poll of economists showed 45 of 63 thought the US Federal Reserve would trim the funds rate by its September 18 meeting, with 6 of those saying they will cut before then and 18 saying they will stay on hold. Most expected a quarter-point cut by then.

Having been up 91 points at one stage by mid morning the FTSE-100 was up some 60 points at 6255, led by financials with Northern Rock standing out up some 6 per cent as talk that it was now vulnerable to a bid continued to do the rounds. ING and HSBC are seen as potential predators, although an ING spokesman later said Northern Rock "is not on our radar screen." The feeling has also been helped by Bank of America’s acquisition of a $2 billion stake in US mortgage provider Countrywide Financial.

Man Group, the fund of hedge fund manager was also continued its rally adding another 3 per cent to its gains of yesterday as analysts point out that its key US fund is proving resilient to the credit turmoil.

HBOS also featured on the leaderboard, up 2.5 per cent to 902.5p. Goldman Sachs trimming its price target on the bank by 15p to £12.30.

Goldman Sachs put Alliance & Leicester, long the subject of takeover rumours, on its “conviction” sell list but kept its price target of 912p. A&L also edged up.

Rentokil Initial was one of the hardest fallers on its first day in the blue chip index, after interim results that were roughly in line with forecasts. But even it was down less than 2 per cent.

Among mid-tier stocks, Tullow Oil was a top performer in morning trade, up more than 5 per cent after its discovery of oil in Ghana announced yesterday. Both Citigroup and Morgan Stanley raised their price targets on the explorer this morning.

Electra Private Equity also helped restore some confidence to the credit market after Royal Bank of Scotland refinanced one of its acquisitions – animal labelling firm Allflex Holdings. It jumped 9 per cent.

Over in the Far East, the Bank of Japan froze the cost of borrowing at 0.5 per cent for the sixth month in a row as the recent turmoil on global financial markets forced it to temporarily abandon its drive to “normalise” Japan’s ultra-low interest rates.

The decision, seen by this morning as a near certainty by traders and economists, played into a rising sense of optimism on Asian markets. Even before the Bank of Japan’s decision was announced, the Nikkei 225 and other main Asian bourses had put on strong spurts before lunch, mainly following the overnight moves in New York.

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• Brown targets fat cats after nationalising banks
• US shares soar on global banking rescue
• Europe follows Brown to head off meltdown