The dollar rebounded from a one-year low against the euro on Wednesday as US stocks reversed gains sparked by an optimistic statement from the Federal Reserve on the economic outlook. The dollar had earlier sold off after the Fed said US economic activity had picked up after a severe downturn and renewed its pledge to keep rates exceptionally low for an extended period to support the recovery.
Shares of Wall Street initially advanced following the Fed announcement, eroding safe-haven demand for the greenback, but gains fizzled as investors pared bullish bets. "This is a whole buy-the-rumour, sell-the-fact kind of reaction. Most people were expecting the Fed to upgrade its assessment of the economy and they did that. The subsequent attempt to extend the rally in (stocks) stalled and now we saw the reversal," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. Dolan added that the euro's failure to extend gains beyond $1.4850 also triggered the dollar's bounce.
The Fed, as widely expected, held overnight lending rates at close to zero percent on Wednesday and repeated its intention to keep rates exceptionally low for some time. In a statement, the US central bank also said that the economy was in recovery and decided to gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition.
The euro rose as high as $1.4842, according to Reuters data, its highest level since September 2008. It last traded down 0.4 percent at $1.4728. The dollar rose 0.2 percent to 91.34 yen. "We saw some US dollar weakness (initially) and since then we've essentially drifted back to the levels we were at leading into the statement," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "The (Fed) statement was much similar to the last statement ... and in terms of the currency market, it really keeps the old theme in place," she added.
The dollar index, which measures the dollar's value against a basket of six other major currencies, was up 0.4 percent at 76.390, after falling to 75.827, its lowest since August, 2008. Dolan said the dollar index's bounce back above the 75.90 low was "a signal for shorts to cover."
Traders were also keeping an eye on a Group of 20 summit, which is expected to call on countries to maintain economic stimulus plans, a move, which could give a boost to riskier assets. Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said he expects currency issues to be "very low on the list" of things to discuss for G20 policymakers. Speculation that the G20 would focus on rebalancing the global economy, a process that almost certainly calls for a weaker dollar, also hit the US currency on Tuesday.
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