Dollar drops after cautious Fed says will be patient with rate hikes

NEW YORK: The dollar fell on Wednesday, after the Federal Reserve held interest rates steady, as expected, and struck a cautious tone on its outlook for the economy and future interest rate increases.

The greenback hit session lows versus the euro and gave up gains versus the yen immediately after the Fed statement. Prior to the Fed comments, the dollar traded higher across the board.

The Fed said it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty about the US economic outlook.

It also said it would be prepared to use the full range of tools, including altering the size and composition of its balance sheet, if the economy needed more monetary accommodation, than could be achieved with rate cuts.

"The press statement was reassuringly dovish, but it wasn't hugely unexpected. The place where there was more surprise...is that we got a shift, it seems, around the balance sheet," said James McCann, senior economist, at Aberdeen Standard Investments in Boston.

"The language was very, very vague, and probably deliberately so. But the preparedness for the Fed to be more accommodative around the balance sheet seems to be a little new," he added.

Following the Fed statement, contracts tied to the policy rate continued to price about a one-in-four chance of a 2019 Fed rate hike, and contracts maturing in 2020 were signaling a small but rising chance of a rate cut then.

Brian Coulton, chief economist at Fitch Ratings in London, said the Fed comments read "more like a pause" than a strong signal that the US central bank was approaching the end of its tightening cycle.

In mid-morning trading, the dollar index sank 0.4 percent to 95.455.

The dollar dropped 0.5 percent against the yen to 108.93 yen , and was down slightly versus the Swiss franc at 0.9944 franc.

The greenback was earlier bolstered by data showing strong US private sector jobs growth for January.

Payrolls processor ADP reported that the US private sector added 213,000 jobs in January. That beat forecasts for gains of 178,000, but the monthly total was lower than job gains of 271,000 in December.

The euro rose 0.4 percent to $1.1479., recovering from earlier losses.

Softer-than-expected European data released in the last few weeks suggested that the European Central Bank is expected to hold off tightening until year end.

"Our three-month forecast for euro/dollar is between $1.14-$1.16 levels as we don't expect changes from either of the two major central banks (Fed, ECB)," said Antje Praefcke, a currency strategist at Commerzbank based in Frankfurt.