NEW YORK: The dollar dropped to its lowest level against the euro in five weeks on Wednesday after the US Federal Reserve pledged to keep interest rates low for much longer than anticipated and indicated readiness to further stimulate the economy.
While the dollar maintains appeal as a safe-haven, particularly as Europe's debt crisis continues to fester, its allure is limited by unfavorable interest rate differentials, particularly against higher-yielding currencies.
Federal Reserve Chairman Ben Bernanke on Wednesday said the US central bank, which has held rates nears zero since December 2008, may consider further monetary easing through bond purchases if the economy deteriorates further.
"Bernanke's comments about asset purchases means QE3 is still on the table, and that added more fuel to the euro's climb," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
A third round of quantitative easing would be negative for the dollar as it would be tantamount to printing money and would therefore dilutes the greenback's value.
The Federal Reserve on Wednesday also pushed back the likely timing of an eventual interest rate hike until late 2014, a full 18 months later than it had previously said, as it nurses a still-sluggish economic recovery.
"The fact they expect to keep rates at these levels through late 2014 is somewhat bearish for the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.
In late New York trade the euro was up 0.7 percent at $1.3114.
Ray Attrill, head of FX strategy for North America at BNP Paribas in New York, also said there is a risk "they are going to push that (forecast) out further at another Fed meeting. I still think that is the risk, but there's nothing in the distribution of the forecasts to lead you to that."
The Fed also took the historic step of setting an inflation target, of 2 percent, which moves the Fed in line with many of the world's other major central banks.
The euro has been supported against the dollar in recent sessions by a squeeze in extreme short positions. A decline in funding costs for Spain and Italy and recent data showing surprising strength in European manufacturing and services this month have also lent support.
"Investors are waiting for more definitive progress in talks for private sector bondholders to take voluntary losses on Greek government debt, while reports that the ECB remain opposed to restricting its Greek debt holding is weighing on sentiment," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
The yen, meanwhile, extended losses from the previous session as Japan's first annual trade deficit in more than 30 years called into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to fickle foreign investors.
The dollar reached as high as 78.28 yen, according to Reuters data, its highest level since early November. The greenback was last trading at 77.74 yen, up 0.1 percent on the day.
Chartists highlighted resistance posed by the 200-day moving average at 78.33 yen and the 61.8 percent retracement of the October-January fall at 78.31 yen.
Against the yen, the euro was last at 101.88 yen, up 0.7 percent on the day, well above an 11-year low struck on Jan. 16.
The New Zealand dollar climbed to an almost three-month high against the US dollar in New York trade after the Reserve Bank of New Zealand, the country's central bank, left the Official Cash Rate unchanged at 2.5 percent.
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