The dollar struggled to take back lost ground in Asian trading on Friday after skidding to three-week lows against the euro and a basket of currencies following the Federal Reserve's decision to hold interest rates steady and cut its long-term US growth outlook.
Opinions had been divided over whether the Fed would raise rates on Thursday for the first time since 2006, and the announcement triggered broad dollar losses, though the central bank left open the possibility of a modest policy tightening later this year. The euro gained more than 1 percent to a three-week high of $1.1441 and was last at $1.395, down about 0.3 percent from late US levels but still well above Wednesday's one-week low of $1.1214, and on track to gain about 0.5 percent for the week.
The dollar index tracking the greenback against a basket of six major currencies edged up about 0.1 percent to 94.634, after dropping as low as 94.360 on Thursday, its lowest since August 26. It was down about 0.6 percent for the week. The dollar edged lower against the yen after a more moderate decline overnight. It was buying 119.96 yen, slightly above late US levels after falling as low as 119.65 yen earlier, and was poised to shed about 0.5 percent for the week.
"In today's session, it's hard to see any some sort of dollar/yen trend," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo. "In the Tokyo session, there is no reason to increase either dollar-long or -short positions after this latest Fed decision, ahead of the Silver Week holiday here." Tokyo markets will be closed for holidays for much next week, reopening on Thursday.
"As the Fed said, the US economy and employment situation remain solid, so it's very natural that the Fed will start to hike rates," Murata said. Despite some encouraging domestic signs, Fed Chair Janet Yellen said the external outlook was less certain. "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the US central bank said.
The latest count put 13 of 17 Fed policymakers expecting to raise interest rates in 2015, down from 15 at the bank's June meeting. Four policymakers, up from two, now believe the bank should stand pat until at least 2016. "With the overwhelming majority in the FOMC still expecting to hike this year, and the domestic economy maintaining its momentum, we stick to our call of a December rate hike," strategists at Rabobank said.
"Although Yellen said that October remains a possibility, we doubt that the economic data between now and then will be sufficient to hike," they said in a note to clients. Rates futures placed an 18 percent chance that the US central bank would end its near-zero interest rate policy in October, down from 41 percent Thursday morning, according to CME Group's FedWatch program.
The Australian dollar added about 0.3 percent to $0.7192, but remained below a four-week high of $0.7277 hit in the wake of the Fed's announcement. The Aussie got a lift from parliamentary testimony by Reserve Bank of Australia Governor Glenn Stevens who said the economy was growing and the exchange rate was adjusting to a change in the terms of trade.
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