NEW YORK: The dollar struggled near a seven-month low against a basket of major currencies on Thursday after the Federal Reserve surprised many investors, who had positioned for a scaling back in its stimulus program, by leaving policy unchanged.
Fed Chairman Ben Bernanke, citing tightening financial conditions, on Wednesday refused to commit to begin reducing the bond purchases this year. The Fed also cut growth forecasts for 2013 and 2014, citing strains in the economy from tight fiscal policy and higher mortgage rates.
The safe-haven yen fell too, sliding to a 3-1/2-year low against the euro, as the Fed's decision sparked a rally in riskier assets and currencies. So widespread was the yen sell-off that it also hit a 23-year low against the Swiss franc, another safe-haven currency.
"Future tapering has probably ended up being a meeting-to-meeting call once again, beholden to a small handful of economic data points," said Dean Popplewell, chief currency strategist at OANDA in Toronto. "The Fed is correct to be hesitant. Global growth is precarious at best, and turning the taps too tight too soon, would have a huge global domino effect"
The dollar index was last little changed after the previous session's 1.1 percent drop, its biggest one-day slide in more than two months, after the Fed kept the size of its asset-buying program at $85 billion a month, confounding expectations for a reduction of roughly $10 billion.
The index has fallen to levels not seen since well before Bernanke first floated the idea of reducing the stimulus in May. The dollar index last stood at 80.238, having fallen to 80.060 on Wednesday, its lowest since February.
The dollar's losses saw the euro hit a 7-1/2-month high of $1.3568, with this year's high of $1.3711 the target for some euro bulls, traders said.
"US yields are lower and it makes sense to move out of dollars into the euro and sterling," said Jeremy Stretch, head of currency strategy at CIBC World Markets In London.
"By the time we have the European Central Bank meeting early next month, we could have the euro at $1.37 which will pose a headache to (ECB President Mario) Draghi."
A stronger euro zone currency would hurt exports and is the last thing the ECB would want, given it has pledged to keep monetary policy accommodative for longer to support a nascent economic recovery.
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