The dollar hit a three-week low versus a basket of major currencies on Thursday, extending the previous day's losses after a statement from the Federal Reserve trimmed expectations for near-term interest rate hike.
The single European currency climbed to a record high against a broadly weaker yen after European Central Bank officials on Wednesday warned about persistently high inflation, cementing expectations the ECB will hike rates next week despite the weaker sentiment data.
The US central bank held its benchmark fed funds rate steady at 2 percent, effectively ending one of its most aggressive rate cutting campaigns to limit the economic fallout from the housing and credit crisis.
The Fed voiced greater concerns about inflation in the statement accompanying its two-day policy meeting but also said it expected price pressures to moderate this year.
"The FOMC statement was viewed as not being quite as hawkish as some market participants had feared, so that's why the dollar has a slightly softer tone today," said Robert Minikin, senior FX Strategist at Standard Chartered.
A Reuters survey, taken shortly after the Fed's rate verdict, showed all 16 primary dealers polled expect the central bank to stand pat at its next policy meeting in August.
At 1104 GMT the euro was 0.2 percent higher at $1.5703, having hit a 2-week high earlier at $1.5726. It was briefly knocked earlier after data showing French consumer confidence had fallen to its lowest headline level since 1987 while Italian business morale hit a 3-year low. But expectations for a July ECB hike remained intact after data from German states pointed to an increase in inflation in the eurozone's biggest economy.
Euro/dollar has been trapped in a $1.5285-$1.5844 range for about two months, but some analysts said the near-term outlook for the pair remained mildly bullish.
"The market is dealing in hard facts and the ECB is very likely to be raising rates next week and probably still sounding pretty hawkish even after they've hiked," said Chris Turner, head of FX strategy at ING in London.
Against the Japanese currency, the dollar was steady at 107.74 yen, while the euro was up 0.1 percent at 169.20 yen, having hit a record high 169.45, according to Reuters data.
The Japanese currency has been hurt by expectations the Bank of Japan will keep interest rates at a low 0.5 percent for a while due to weakness in the domestic economy. The yen also slid against other higher-yielding currencies, with the Australian dollar hitting seven-month highs around 103.73 yen, while the Swiss franc hit a 17-year high of 104.59 yen.
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