TOKYO, Feb 1 The dollar remained pressured on Thursday after the Federal Reserve left int

TOKYO, Feb 1 (Reuters) The dollar remained pressured on Thursday after the Federal Reserve left interest rates unchanged as expected but said inflation pressures were likely to moderate in the future.

After the Fed kept interest rates steady at 5.25 percent on Wednesday, the central bank said in a statement that readings on core inflation have improved modestly in recent months.

The Fed maintained its overall assessment, however, that the economy was likely to expand at a moderate pace and that some inflation risks remain, saying monetary tightening may be needed depending on the outlook for both inflation and economic growth.

Traders said the dollar was sold as some investors had expected more hawkish Fed comments on inflationary risks after recent solid economic data, including fourth-quarter gross domestic product released earlier, which exceeded forecasts.

The U.S. Treasury market rallied as market players saw chances of any rate increase this year as slim.

''The statement pt intact the Fed's wariness over inflation risks, but the dollar was pulled down by falling Treasury yields which appear to be spurred by strong short-covering,'' said Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase in Tokyo.

Sasaki said the dollar may remain pressured as long as bond yields kept falling, but sentiment may shift again if upcoming data, including Friday's key jobs figures, is strong.

The U.S. currency also extended losses after U.S. Treasury Secretary Henry Paulson said on Wednesday he was watching the value of the yen ''very, very carefully.'' But he also said the yen's current low value reflected Japan's economic fundamentals.

His comments triggered yen short covering as it followed remarks earlier this week from European policy-makers expressing concern about the yen's weakness against the euro.

''It's almost like he is acknowledging the yen's weakness. His comments might weigh on the dollar, but it won't lead to yen buying when there is such a huge yield difference,'' Sasaki said.

The dollar was trading at 120.70 yen little changed from late U.S. trade, and slipping further from a four-year high of 122.20 yen hit on Monday.

The euro held above the psychologically important $1.3000 level, trading at $1.3024 compared with $1.3033 late in U.S.

trade.

The euro eased to 157.23 yen from 157.31 yen.

Reuters SBA VP0553