The dollar hit a three-week low against the euro on Friday, extending losses after the Federal Reserve gave the clearest signal yet it may soon take a break from a two-year campaign of non-stop interest rate increases.
The Fed said slowing economic growth should help rein in inflation after it lifted overnight rates for a 17th straight time to 5.25 percent, as widely expected.
Building expectations that the Fed could raise rates to 5.5 percent in August had driven the dollar to two-month highs against major currencies in the past week.
"People have got caught long on dollars at very wrong levels," said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo.
"We're trading on interest rates," he added. "Basically the Fed trumps all at the moment."
The Fed also made clear it could tighten monetary policy again in the future depending on how both growth and inflation readings pan out. Futures on the fed funds rate show a roughly 65 percent chance of another move in August.
"There is still the possibility for an additional rate hike by September, and that's what fed fund futures are pricing in. So any dollar fall will be limited," said Kikuko Takeda, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
For more clues about whether the central bank will further tighten credit, traders are looking to the US PCE index, the inflation gauge most closely watched by Fed policymakers.
The dollar has come under pressure this year as the European Central Bank is expected to keep raising rates and the Bank of Japan prepares to start doing so as well after holding rates at virtually zero for more than five years.
The yen briefly gained after data showed Japanese core consumer prices rose for a seventh straight month in May, reinforcing expectations the BoJ will start raising rates next month.
The dollar slipped to 114.85 yen from near 115.20 yen, after having slid more than 1 percent on Thursday. The euro rose 0.4 percent to $1.2715 and climbed to near $1.2720, the strongest since June 8. The single currency edged up to 146.05 yen and took aim at the all-time high of 146.65 hit this week.
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