Dollar falls against euro as Fed keeps rates at 1%

The dollar fell against the euro in New York yesterday after the Federal Reserve kept its target interest rate at a 45-year low and said it can be patient in keeping the rate slow to spur US job growth.

Fed policy-makers have kept the rate for overnight loans between banks at 1% since late June to spur business investment and prevent inflation from slowing to the point of outright deflation, or falling prices. Deflation keeps a lid on corporate profit margins and acts as a deterrent to hiring.

By contrast, the European Central Bank’s benchmark rate is 2% and the Bank of England’s is 4%. Higher rates make a nation’s financial assets more attractive to investors. The euro gained 20% against the dollar last year and the pound climbed 11%.

“The market is positioned for a positive statement on labour markets or even in the inflation scenario. No news on that or a negative comment, and we can see a sell-off in the dollar,” Rebecca Patterson, currency strategist at JP Morgan Chase & Co said before the Fed’s announcement.

The US economy has shed 2.3 million jobs since President George W Bush took office in January 2001, including 1.07m since the economic expansion began in November 2001.

Unless the shortfall is made up, Bush will become the first president since Herbert Hoover to end a term with fewer jobs than when he started.

Economists at 10 of the 23 primary US government securities dealers surveyed late last week said they expect the Fed will wait until 2005 to raise its rate. In December, just six economists said the Fed would wait that long.

“Rates will be stable for a long period of time,” David Goldfarb, chief financial officer at Lehman Brothers Holdings Inc, said.