The strength of the United States dollar proved dramatically short-lived yesterday after the currency fell sharply following the release to the US Congress of a damning report accusing US President Bill Clinton of alleged sexual misconduct and perjury. After climbing to as high as 138.3 yen on Wednesday following the surprise cut in Japanese short-term interest rates, the dollar slid steeply to 133.99 yesterday, down more than 2.5 yen from the previous close in New York of 136.65. Analysts said fears that the report - written by US independent counsel Kenneth Starr - might lead to the impeachment of Mr Clinton were rattling market sentiment. They said this was adding to lingering concerns that the US Federal Reserve might also be poised to cut interest rates, perhaps even before the next policy-setting Federal Open Market Committee Meeting on September 29. Recent comments by Federal Reserve chairman Alan Greenspan have also been interpreted by the market as an indication a rate cut may be on the way. Standard & Poor's MMS International currency analyst Dan Katzive said: 'What you are beginning to see are concerns about the US political situation influencing the US dollar, after a period when the issue has been in the background, but has not been acknowledged.' The dollar was down 1.7 per cent against the yen yesterday and fell to a near 10-month low against both the deutschemark and the Swiss franc. 'The press has decided Clinton is on his way,' DKB International chief economist Gerard Lyons said. 'If that is the case it will not be a good background for US assets, particularly as the whole process will take some time. 'Clinton will not give up without a fight and his credibility will be damaged.' Warburg Dillon Read currency strategist Cameron Crise said: 'The fact that people are saying that he committed a criminal offence is getting investors worried. 'It's a concern over the possibility that there could be a political vacuum at the helm of the world's largest economy, at a time when the world is crying out for global leadership.' Analysts said there was also concern in the market over the possibility that the 0.25 per cent rate cut by the Bank of Japan this week could herald a wave of interest-rate cuts. Most analysts do not believe such an eventuality will occur, but warn that market sentiment is particularly brittle. Mr Katzive said: 'Some people are making the connection with the implications for US policy following the Bank of Japan move . . . we don't buy it.' But DKB's Mr Lyons pointed out that Japan's move proved just how benign the global interest-rate environment was. He also noted that last weekend's meeting between Japanese Finance Minister Kiichi Miyazawa, US Treasury Secretary Robert Rubin and Mr Greenspan would have given Japan some indication of US monetary policy. Warburg's Mr Crise said further yen supportive factors came from large investment funds closing out long dollar positions and Japanese funds selling the dollar to hedge long Treasury positions. 'If you were holding your head in your hands [on Wednesday morning] seeing the yen around 130, the fact that it moved up becomes a big buying opportunity.' He said the fundamentals still pointed to a weaker yen, but there was now a lack of sufficiently large fresh buying interest. Mr Crise said investors were still reluctant to establish fresh yen positions, given the negative investor sentiment on emerging markets. Some analysts suggested that the Bank of Japan's rate cut had also been taken to stem the strength in the yen, given that the rising currency, combined with a fall in stock markets, was acting as a monetary tightening device. That device was contributing to slower economic activity. Barclays Capital chief currency economist Brian Martin said: 'A weaker currency, after all, adds to cushion the severity of the crash in economic activity. 'In addition, by cutting funding costs, money managers will take advantage of a steeper yield curve to lend. 'At the margin this can help to refinance the banks and the life assurance companies.'