Dollar gains as US interest rates hold steady

THE dollar erased some of its losses against the European single currency yesterday, at $1.22 to the euro, after falling as low as $1.2276 earlier, for a new record.

Meanwhile the US Federal Reserve held interest rates at 45-year lows yesterday as policy-makers renewed a vow to keep borrowing costs down for a long time while still saying the threat of falling prices had eased.

The rate-setting Federal Open Market Committee said the chance of an unwelcome drop in inflation was now almost equal to the possibility price pressures could pick up.

Policy-makers voted unanimously to hold the federal funds rate charged on overnight loans between banks at 1%, the lowest since 1958.

The beleaguered US dollar got a mild lift from the news while Treasury bond prices rose.

Most recent indicators show the US economy gaining some steam after enduring a mild recession in 2001, but at a ragged pace that is not yet generating a healthy rise in hiring.

The unemployment rate fell to an eight-month low of 5.9% in November but there are still 2.4 million fewer jobs in the US than before the recession.

At the same time, US industry is operating at only about 75% of capacity.

This leaves significant slack that must be taken up before there is any risk of the economy overheating and pushing up prices.

With the race accelerating for the November presidential elections, Bush administration officials have been claiming credit for stimulating faster economic activity through tax cuts, while also voicing concern about jobs.

Democrats have served notice they intend to attack the Bush administration for presiding over the direst job losses in decades while offering tax cuts slanted to wealthier Americans.

US Treasury Secretary John Snow said on Monday that the booming 8.2% annual rate of growth in gross domestic product in the third quarter may have marked a transition to a more vibrant economy, which will boost job prospects.