US stock markets surged ahead on speculation that the US Federal Reserve may consider cutting interest rates and as the battle for the White House is nearing a conclusion.
The technology-heavy Nasdaq index posted record gains in both point and percentage terms, rising more than 10 per cent in the session.
The move took the steam out of the recent euro rally. The single European currency slipped back to $0.8828 at the Dublin close from $0.8867 on Monday, when it climbed above 89 US cents for the first time in over two months after firming almost 6 per cent in a week.
In a speech signalling a change for the first time in a year in the Fed's view of the balance of risks facing the US economy, Federal Reserve chairman Mr Alan Greenspan suggested the slowdown in growth meant that inflation was no longer the main worry for the central bank's policy-makers in setting interest rates.
Financial markets welcomed the remarks as an indication that the Fed stood ready to cut interest rates soon if the US economy showed further signs of slower growth. By the close, the blue-chip Dow Jones Industrial Average was 338.62 points or 3.21 per cent higher at 10,898.72 and the Nasdaq Composite was up 274.02 at 2,889.77, a rise of 10.48 per cent, well above the previous record percentage gain of 7.94 per cent last May.
The Standard & Poor's 500 recorded a gain of 51.55 (3.89 per cent) at 1,376.52.
Mr Greenspan stressed that the deceleration in the rate of growth since the summer was a healthy downshift to a more sustainable pace rather than a hint of a looming recession, and said the risks were now more evenly balanced between an acceleration in price pressures and a serious economic downturn.
Investors that had deserted the US markets in droves in past weeks were lured back by the prospect of strong gains on Wall Street, analysts said.
"Most people now assume the game is over . . . so I think that's taken one of the uncertainties out of the market," Mr Alfred Kugel, senior investment strategist at Stein, Roe & Farnham, said of the election dispute. "Mr Greenspan's talk probably addressed the second one."
"The dollar took heart from the increased probability of a near-term resolution in favour of Bush," Royal Bank of Scotland Financial Markets analyst Mr Kit Juckes said. "The weakness of the US equity markets and the US political uncertainty has been the major force driving the euro higher," he said.
Some economists in the US were nevertheless predicting further gains in the months ahead for the euro, which has lost around a quarter of its value against the dollar since its launch in January 1999.
Bank of America economist Mr Lorenzo Codogno said that perceptions towards the euro had finally changed. "The euro probably won't test a new low this year and will gradually recover from now on," he said. "We forecast a $0.92 level in the first quarter of 2001, $0.97 in the second, and back to parity in the second half of the year."
Mr Greenspan said the Fed was closely monitoring the US economy's transition to a more sustainable pace of growth, signalling the central bank no longer views inflation as the main threat to the world's biggest economy.
The inflation-fighting Fed, which has hiked interest rates six times since June 1999, next meets to decide monetary policy on December 19th.
The Fed is expected to leave key short-term rates unchanged, but economists believe it will take a more balanced view of economic conditions, shifting away from the potential for overheating. Such a move would open the door to interest rate cuts next year.
