The dollar hovered within striking distance of two-month lows on Tuesday after the Federal Reserve kept US interest rates steady but appeared to leave leeway for more rises if price pressures persist.
The dollar fell sharply after the Fed's decision, which marked the first policy meeting in more than two years in which rates were not raised. But it recouped much of those losses, as many analysts said the US central bank would likely continue to tighten policy if inflation did not ease. "The dollar definitely moves lower from here," said Michael Woolfolk, senior currency strategist at The Bank of New York.
"The key dovish point is that inflationary expectations are likely to moderate over time even though core inflation is elevated. The door remains open, of course, for more hikes, but it's not wide open," Woolfolk said.
In late afternoon trading, the euro was at $1.2845, up around 0.1 percent from late Monday. It hit a two-month high of $1.2909 last week and came just short of revisiting that high in the wake of the Fed policy meeting. The dollar index, a gauge of the dollar against a group of major currencies, was at 84.79, slightly above a two-month low of 84.40 hit on Friday. The dollar was nearly unchanged at 115.08 yen, while sterling was up 0.2 percent at $1.9090, off a 15-month peak of $1.9130 reached last week.
Short-term investors last week had significantly increased bets against the dollar anticipating the Fed would definitively signal the end of the current tightening cycle and leave benchmark short-term US interest rates at 5.25 percent.
The Fed's uncertain outlook on rates in its post-meeting statement combined with the inability of the market to push the dollar to fresh two-month lows have forced some speculators to cover their bets, limiting the greenback's losses.
"There was a lot of pent-up appetite to sell the dollar on a pause ... but the message the Fed is trying to send is they don't want to hike again but they're prepared to do it if the data demands it," said Richard Franulovich, currency strategist with Westpac Bank in New York.
Data released earlier on Tuesday showed US unit labour costs in the second quarter rose at the fastest pace since the final three months of 2004, suggesting inflation indeed could continue to nag the Fed.
Some money managers see the dollar supported in the short term by expectations the Fed could resume its tightening trend but in the long term weakening once it definitively concludes the rate-raising cycle.
"In the real short term, you probably have a dollar rally to square up some of these weaker positions," said Ihab Salib, global bond portfolio manager with Federated Investors in Pittsburgh, Pennsylvania. "Longer term, the dollar will return to a secular weakening trend," said Salib, who manages $2 billion in assets.