The dollar shot higher on Wednesday, gaining 1 percent against the euro and the Swiss franc after the Federal Reserve shocked traders by dropping the phrase referring to a "considerable period" of loose monetary policy from its statement.
Although the Federal Open Market Committee left interest rates unchanged, as expected, it surprised analysts by its accompanying policy statement, which said the Fed can be patient in removing its interest-rate policy accommodation.
That altered the Fed's pledge made in August to keep rates low for a "considerable period," taking many dealers aback.
The mere hint that the central bank might be prepared to raise rates down the road is likely to buoy the US currency, analysts said.
"Incrementally, it could be read that rates are going higher sooner than the previous language indicated. It moves in the direction of cutting the interest rate differential between the US and European rates, and that is positive for the dollar," said Pierre Ellis, senior international economist with Decision Economics, New York.
"This doesn't likely change anything for the short- to medium-term Fed outlook, but does remove an impediment to raising rates when they choose to," Ellis added.
In late afternoon New York trading, the euro was at $1.2482, down about 1.2 percent.
Against the yen, the dollar was at 106.08 yen, up 0.4 percent on the day, above Tuesday's three-year low around 105.42 yen, according to Reuters data.
Against the Swiss franc, the dollar was up 1.2 percent to 1.2552 francs.
Against the Canadian dollar, the US dollar climbed 1.5 percent to C$1.3246. Sterling was down 0.3 percent to $1.8207.
Prior to the Fed announcement, most analysts had said that until the Fed signalled it was prepared to contemplate raising interest rates, the greenback would likely continue to languish against higher-yielding currencies.
But traders appeared initially to seize on the departure from the previous statement's language as a cue to start positioning for an eventual tightening of US monetary policy, which would likely bolster the dollar.
Even so, some analysts said they were sceptical that the dollar's rebound on Wednesday might have been overshot.
"The dollar's rise in reaction to this (FOMC statement) is a little bit overdone. The change in language is actually minuscule and still reflects a very dovish Fed," said Lara Rhame, senior economist with Brown Brothers Harriman in New York.
Downward pressure on the dollar from some recent signs of softness in US economic data, combined with the wide US current account deficit, could well return the greenback to its long-running descent, analysts said.
In Tokyo trade on Wednesday, the dollar jumped nearly 1 yen to 106.62 yen, making dealers suspect authorities had taken intervention action, although no confirmation was available.
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