The US Federal Reserve is expected to sanction another cut in US interest rates when it meets tomorrow in a bid to arrest the decline in economic growth.

The US central bank is expected to reduce interest rates by a further 0.25 of a percentage point, as economic data continues to show slowing activity in the US economy.

The US Commerce Department confirmed on Friday that US trade with the rest of the world had dropped again. New figures showed that the value of US exports and imports has shrunk over the past 12 months at a pace that has not been seen for more than eight years.

In June, US imports dropped 0.7 of a percentage point to $115.4 billion (€126 billion) having declined by more than 2 per cent in May. Exports were also weaker for the third successive month, dropping 1.9 per cent in June to $86 billion.

The wider trade deficit may lead to a downward revision in second-quarter US growth forecasts, which would impact further on the dollar.

Fears over the US economy have weakened the dollar against the euro, with the markets now expecting the Federal Reserve to move interest rates even lower.

The dollar closed at 0.9158 against the euro on Friday, as the US currency continued its slide on the currency markets.

Comments by the US Treasury Secretary, Mr Paul O'Neill, last week failed to shore up the dollar after he omitted the usual reference to the currency as the "strong dollar".

Some traders took this to be a "sell" signal, sending the dollar lower and benefiting the euro. Market sources believe much of this trading is speculative, with traders building short-term positions in the euro which could be reversed soon again.

The Federal Reserve has responded swiftly to softening economic conditions.

So far this year it has reduced its key market rate by 2.75 percentage points to 3.75 per cent. The market now believes this rate will move closer to 3.5 per cent.

Pressure is also building for the European Central Bank to cut interest rates. Analysts are expecting a rate cut of between 0.25 and 0.5 of a percentage point at its next meeting at the end of the month.

Inflation data for the euro zone has reported that consumer price increases have been declining and most analysts believe the ECB will reduce rates to boost economic growth prospects in Europe.

Inflation in the euro zone in July fell to 2.8 per cent compared to 3.0 per cent in June, according to official figures issued on Friday.

Currency analysts suggest that the US currency's recent decline against the euro reflects growing conviction that the currency is overvalued, given fears of a prolonged economic slowdown. "The principal driver of the dollar's recent decline appears to be mounting concern over the US recovery," said Mr Robert Sinche of Citibank.

But he added that the dollar's precipitous decline of recent weeks may have been exaggerated.

"We believe that the market is too pessimistic on the prospects for a US recovery and anticipate emerging evidence over coming months that the US is on track for an upturn in the second half."