NEW YORK: The euro rose to a three-week high against a weaker dollar on Wednesday ahead of a policy statement from the US Federal Reserve, with lower euro zone peripheral bond yields helping to allay concerns about the outlook for the euro zone.
Traders expected the Federal Reserve to restate its intention to keep rates near zero throughout 2014 and possibly hint at more easing, especially after recent weaker jobs data.
However, traders expected gains in the euro to be limited as the currency remained vulnerable to budget problems and political uncertainty in several euro zone countries.
The dollar extended losses against the yen on Wednesday after data indicated demand for long-lasting US manufactured goods dropped by the most in three years in March and a gauge of business spending plans fell, suggesting factory activity lost momentum as the first quarter ended.
"Market participants will remain focused on any changes to the (Fed) statement, given that the Fed decision will have incorporated updated forecasts for inflation, employment and growth," said Eric Theoret, currency strategist at Scotiabank in Toronto. "The press conference should see Fed Chair Bernanke remain cautious on the economic outlook given the moderate pace of growth, the elevated level of unemployment, and the fiscal uncertainties as we head toward year-end."
The euro rose as high as $1.3235, according to Reuters data, supported by relief as successful debt auctions on Tuesday sent yields on Dutch, Spanish and Italian bonds lower. It was last at $1.3205, up 0.1 percent on the day.
But investors are waiting for the Fed statement at 12.30 p.m. EDT and accompanying news conference later on Wednesday.
Some analysts said a more hawkish statement, pointing to improvements in the economy and dimming chances of more stimulus, would come as a surprise and could give the dollar a strong boost.
The German government sticking to its growth forecasts and backed the European Central Bank in returning to a "normal mode" of monetary policy also benefited the euro.
This offset a sale of German 30-year bonds that was technically uncovered as record low yields dampened demand for the safe-haven paper.
"Euro/dollar is gradually drifting lower but not as quickly as many in the market thought, possibly because peripheral yields haven't risen too much," said Paul Robson, currency strategist at RBS.
STERLING FALLS
Sterling fell from a seven-month high against the dollar after data unexpectedly showed the UK economy slid into recession after contracting during the first quarter.
This curbed demand for the UK currency, which has attracted strong support recently as an alternative to the euro during heightened concerns about budget problems in Spain and other smaller euro zone economies.
Sterling was last down 0.2 percent at $1.6107 while the euro rose 0.3 percent against the pound.
The dollar, which also fell to a three-week low versus the Swiss franc, weakened 0.1 percent against the low-yielding Japanese yen to 81.24 yen, though it stayed above the previous session's one-week trough.
"We did get a move lower in the dollar against the yen and euro (after the durable goods data), but that should be short-lived because we have the Fed this afternoon," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York.
Analysts said the yen could come under pressure as market players position for a Bank of Japan meeting on Friday, when it is expected to increase asset purchases by up to 10 trillion yen ($123 billion).
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