The dollar slipped on Wednesday, with weakness expected to continue the rest of the week after the Federal Reserve kept interest rates low and gave a tepid assessment of the US economy that ensured its Treasury bond-buying program remains in place until June.
The euro briefly rose above $1.3700 but gave up those gains as profit-taking set in ahead of a touted options barrier at $1.3725. If that goes, then $1.3738 is in focus, which is the 61.8 percent retracement of the decline from $1.4283 in November to $1.2860 hit in January.
Beyond that, the November 22 high of $1.3786 is seen as a major target. The dollar also pared gains against the yen immediately after the Fed's statement, dropping to 82.20 from 82.50 before the statement. But it rebounded as US benchmark yields rose. In a statement, the Fed, which voted unanimously at a regular policy meeting to hold interest rates steady, said the US economic recovery, while continuing, has been "insufficient to bring about a significant improvement in labour market conditions." It repeated that rates would remain exceptionally low for an extended period.
The Fed also gave a nod to pressures from rising commodity prices but said measures of underlying inflation remained "somewhat low." This was in sharp contrast to the European Central Bank's view that the recent surge in commodity inflation posed a threat to the region's inflation.
"In general, though, I would say the US economy hasn't really changed that much," said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. In late afternoon trading, the ICE Futures' dollar index fell 0.3 percent to 77.779. The euro was little changed at $1.3691 after hitting a high at $1.3723, just shy of the $1.3725 barrier. There are reportedly sell orders above that at $1.3735-40.
The euro has gained 2.36 percent on the year so far after plunging 6.6 percent in 2010. As the euro recovers, volatility on one-month euro/dollar dropped to four-month lows on Wednesday just below 11.0 percent, suggesting investors are getting less nervous about sovereign debt problems in the euro zone.
The dollar, on the other hand, rose 0.1 percent to 82.27 yen. The Reserve Bank of New Zealand also kept rates unchanged at 3.0 percent, as expected, reaffirming that rates are likely to rise modestly over the next two years. The New Zealand dollar gained versus the greenback after the decision, rising to US $0.7719 from US $0.7649. It was last at US $0.7704, up 0.4 percent.
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