Dollar strengthens as Fed maintains interest rates

17/03/2011 00:00 AST

The dollar strengthened against the yen and the euro in Asian trade yesterday as the US Federal Reserve maintained ultra-low interest rates amid a more positive outlook for the economy.

The euro also slipped against the Japanese currency, buying 112.89 yen from 113.79 yen. The Federal Reserve's decision late on Tuesday to maintain rock-bottom interest rates lent strength to the greenback, said David Forrester, currency strategist for Barclays Capital in Singapore.

"The main reason for that is interest rates... It's a boost for the dollar from the FOMC (Federal Open Market Committee) last night," said.

Fed policymakers kept ultra-low interest rates and $600 billion stimulus spending in place on Tuesday as they noted easing unemployment, a pick-up in consumer spending and growing business optimism.

"The economic recovery is on a firmer footing, and overall conditions in the labour market appear to be improving gradually," the policy-setting FOMC said in a statement.

The US central bank decided unanimously to forge ahead with its $600 billion bond-buying plan despite a considerably more upbeat assessment of the economy and the job market It made no mention of Japan, which is grappling with the aftermath of the country's worst earthquake on record - and struggling desperately to avert a nuclear disaster.

"The economic recovery is on a firmer footing, and overall conditions in the labour market appear to be improving gradually," the Fed said in a post-meeting statement.

It was a much rosier outlook than the Fed had offered after its last meeting in January, when it characterised the recovery as still too weak to significantly bring down unemployment.

The statement also dropped a reference to economic progress being "disappointingly slow" and a list of roadblocks to consumer spending. In addition, it removed a passage stating that employers remained reluctant to hire.

"The Federal Reserve is setting the stage for an end to its aggressive monetary support for the US economy," said Augustine Faucher, director of macroeconomics at Moody's Analytics. "The economic data have been stronger, markets are generally positive, and job growth is picking up."

However, meeting as global stock markets plunged in the aftermath of the Japanese earthquake, policymakers noted US unemployment remains high, underlying inflation low and the housing sector depressed.

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Reuters