The dollar turned notably lower versus the euro on Wednesday after the Federal Reserve turned less positive in its assessment of the U.S. economic outlook.
Also, the British pound gained against the U.S. dollar and euro after minutes from the Bank of England's latest interest-rate meeting showed one member wanted to raise rates. Also, Moody's Investors Service said that the U.K. budget is supportive of the country's Aaa rating and stable outlook.
The dollar index (DXY), which tracks the U.S. unit against six major counterparts, fell to 85.820 compared to 86.079 Tuesday.
The euro (CUR_EURUSD) turned up against the dollar, to buy $1.2312 from $1.2273.
Against the Japanese yen, the dollar () fell to ��89.87, down from ��90.56 late Tuesday.
Fed policy makers downgraded their outlook for the economy, saying that the recovery was "proceeding" -- not strengthening as they had said in April.
"The statement seemed to recognize some of the less favorable data since it met last," said strategist at Brown Brothers Harriman.
The Fed kept the target federal funds rate at the current range of zero to 0.25% and reiterate that rates will remain low for an extended period, as widely expected. Officials also said the European debt crisis was weighing on the recovery.
Stocks fluctuated between negative and positive territory after the Fed's statement was released, leaving currency traders with little direction in terms of how the statement affected investors' appetite for riskier assets, including stocks.
The S&P 500 Index (SPX) lately fell 0.4%.
Rates staying "lower for longer story is generally U.S. dollar negative and has at least contributed to the euro's crawl back above $1.23," said Alan Ruskin, head of currency strategy at RBS.
The U.S. central bank is at least seven months away from tightening, with the risks tilted towards a first move being pushed even further into the future, said T.J. Marta, chief market strategist at Marta on the Markets.
"There are simply too many risks, with Europe invoking austerity measures, China tightening, U.S. fiscal policy at least 'unloosening' if not outright tightening, and November elections creating even more uncertainty regarding U.S. fiscal policy," he said.
The fed funds rate has been set at that range since December 2008, now becoming the longest period that rates have been unchanged since the central bank has used the fed funds rate as its primary policy tool.
Bond trading firms also expect the Fed to use its other tools, such as reverse repurchase operations and term deposit auctions, to normalize monetary policy before raising rates, they said in a MarketWatch survey.
The Fed's meeting ended shortly after the Commerce Department said sales of new homes dropped 33% in May to a record-low pace of 300,000.
"The extent of the contraction was underestimated, prompting many to downgrade expectations for June and July," said Michael Woolfolk, senior currency strategist at BNY Mellon.
Bank of England minutes
Andrew Sentance, an external member of the Bank of England's Monetary Policy Committee, voted for a quarter-point hike due to fears of rising inflation, according to the minutes of the June 10 meeting, and released Wednesday. The other seven members voted to keep rates on hold at 0.5%.
Higher interest rates generally support a currency because they make some assets denominated in the currency, especially government debt, more attractive.
The British pound (CUR_GBPUSD) bought $1.4950, up from $1.4822 in late North American trading Tuesday. Sterling rose as high as $1.4942 earlier. The currency hasn't closed above $1.49 since early May.
The euro fell 0.4% against the pound, buying 82.47 pence.
Also helping the pound, said analysts, was the U.K. government's Tuesday announcement of a budget that would slash spending and the fiscal deficit.
"The consensus appears to be that Chancellor Osbourne's budget was tough enough to maintain the nation's top credit rating without bruising the economy enough to tip it into a second recession," said Andrew Wilkinson, senior market analyst at Interactive Brokers.
"Icing the cake for sterling bulls today was the revelation that MPC member and known hawk Andrew Sentance put a rate rise on the agenda."
Still, the underlying inflation pressures are weak enough to make a near-term rate hike unlikely, said strategists at Barclays Capital. "We see the main risk to our forecast of a rate hike in February to be that it could come sooner rather than later," they wrote in a note.
Chinese yuan
Meanwhile, China's yuan nudged higher against the U.S. dollar, though at a smaller pace than seen earlier in the week.
The dollar was quoted at 6.8206 yuan, from its Tuesday close of 6.8136 yuan. China set the daily dollar parity rate, the mid-point of the band in which it allows its currency to trade, at 6.8102 yuan at the start of trade Wednesday, a fraction below Tuesday's close.
The fixing highlights "that any Chinese yuan appreciation under the new 'flexible' regime is going to be extremely gradual, with the initial optimism that accompanied the weekend statement all but evaporated," BNP Paribas currency strategists, led by Hans Redeker, wrote in a note.
On Tuesday, the dollar recovered some gains against the euro, as U.S. stocks turned notably lower in afternoon trading.
Copyright 2009 Dow Jones Newswires
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