The dollar fell half a percent to three-week lows against the euro on Thursday after the US Federal Reserve kept interest rates steady and left its policy statement largely unchanged, suggesting steady rates to come.
The euro got an extra boost, hitting two-month highs against the yen, from upbeat comments on inflation from European Central Bank President Jean-Claude Trichet and strong German consumer sentiment data.
The US central bank kept the key overnight rate at 5.25 percent as expected for a third straight meeting on Wednesday, predicting moderate economic growth ahead with some reason to expect easing price pressures. Some traders had been expecting the Fed to take a tougher stance.
"The statement has been taken to be slightly dovish, and the dollar has come off a little bit in each session - US, Asia and London - but the move is probably coming to an end soon," said Naeem Hasid, currency strategist at HBOS Treasury Services.
"In the euro, ECB governors have also been keeping up the hawkish tone." All but one of 17 primary dealers in a Reuters poll taken shortly after the Fed's decision said they expect the central bank to hold rates at its next meeting. Eleven dealers expect the next rate move to be a cut, while four forecast a rise.
The euro was up 0.45 percent on the day against the dollar at $1.2656, just off earlier three-week highs. The single currency also rose against the low-yielding yen to 150.48 yen, its highest in nearly two months and close to a record high of 150.78 yen struck at the end of August. It was trading at 150.38, up 0.2 percent from the US close.
The dollar fell 0.4 percent against the yen to three-day lows of 118.61. But other currencies, such as sterling, were strong against the yen. Sterling hit eight-year highs of 223.90 yen, as investors chose to borrow the low-yielding yen in favour of the high-yielding pound - the carry trade.
"Carry continues to dominate currency markets at the moment," said Geoff Kendrick, currency strategist at Westpac. Analysts will focus on data including US September durable goods at 1230 GMT and third quarter GDP figures on Friday, to see if they back up the Fed's reasoning.
Durable goods are forecast to rise by 1.9 percent in September, after being unchanged in August. German consumer sentiment is set to rise for an 11th month to its highest level in five years in November, the GfK market research group said on Thursday.
Trichet said inflation risks in 2007 remained on the upside, and the ECB should remain vigilant in the area of ensuring low inflation. Also on Thursday, ECB Executive Board member Lorenzo Bini Smaghi warned on ending rate hikes too soon. The ECB is expected to raise rates by a quarter point to 3.5 percent in December, and to 3.75 percent by mid-2007, according to a Reuters poll.
A number of other ECB officials and New York Fed President Timothy Geithner are scheduled to speak on Thursday. The New Zealand dollar fell after the country's central bank held interest rates at 7.25 percent late on Wednesday. A majority of analysts had expected a rise.
Meanwhile, the Swedish crown hit the week's lows against the euro after the Riksbank raised rates by a quarter point to 2.75 percent, as expected, but its inflation prediction and warning of more tightening to come was more modest than some investors expected.