Mr Alan Greenspan yesterday quashed expectations that he would signal a near-term rise in US interest rates, reiterating the Federal Reserve's mantra that low inflation meant it could continue to be patient.

The Fed chairman's comments pushed back expectations of rate rises, driving stock prices higher and the dollar lower. US blue-chip stocks hit two and a half year highs.

During twice-yearly congressional testimony, Mr Greenspan said deficits "could cause difficulties even in the relatively near term" as investors woke up to the implications for long-term interest rates.

The Fed has been criticised by some economists for failing to increase interest rates despite rising optimism about economic growth and higher stock prices.

However, Mr Greenspan said that at some point rates would have to rise.

"The evidence indicates clearly that such a policy stance will not be compatible indefinitely with price stability and sustainable growth; the real federal funds rate will eventually need to rise toward a more neutral level," he said.

But investors focused on a key sentence that repeated the expression used after last month's meeting of the Fed's open market committee: "The Federal Reserve can be patient in removing its current policy accommodation."

Financial markets had been waiting nervously for Mr Greenspan's appearance. Long-term interest rates and the dollar fell on his remarks, as investors sought higher yields elsewhere.

The euro jumped a cent to $1.28, as the testimony undercut what little support the dollar had received from the Group of Seven statement at the weekend.