The dollar rose from a 15-year low against a basket of currencies on Wednesday as investors bet the Federal Reserve's deep interest rate cut the previous session will help boost a slowing US economy. The Fed slashed the benchmark federal funds rate to 4.75 percent from 5.25 percent to help relieve strains in credit markets.
The dollar fell on news of the rate cut because it diminished the greenback's relative yield advantage, but it bounced back on Wednesday as investors took the view that easier monetary policy would improve US economic prospects.
The Fed move also helped renew risk appetite among investors who returned to carry trades, which often use cheaply borrowed yen to buy higher-yielding assets elsewhere.
The dollar's rise was helped by gains in US stocks. All three major US stock indexes were on track for a second day of gains on Wednesday. "There is moderate reentry into carry trades with the yen as the cheap vehicle to purchase US equities," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.
In late afternoon trading, the euro fell 0.1 percent to trade at $1.3962 while the dollar was little changed against the yen at 116.07 after trading as high as 116.33. The dollar index was up 0.15 percent at 79.327 after going as low as 79.091, according to Reuters data. Traders and analysts, however, said the dollar is expected to weaken in the long term once investors look again at rate differentials.
"Another rate cut by the Fed is now expected before year end, as further narrowing of the interest-rate differential between Europe and the US should keep the dollar under pressure in the near term," said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York.
Analysts said risk aversion was lower on Wednesday, but investors would likely stay cautious on worries about more bad news tied to the US subprime mortgage crisis and resulting credit market troubles, highlighted by the problems of British mortgage lender Northern Rock.
Earlier, the Bank of Japan held its overnight rate at 0.5 percent, a widely expected move that prompted limited market reaction. The BoJ said it will determine the impact of troubles in the United States before considering an interest rate rise.
Sterling was also under pressure, hitting a 17-month low against the euro for a third consecutive session, as traders interpreted the minutes of this month's Bank of England meeting as signalling possible interest rate cuts in the future. The British pound fell 0.6 percent against the dollar to $2.0003. The euro earlier rose to a 17-month peak of 69.97 pence in the wake of the BoE minutes.
The New Zealand dollar climbed more than 1 percent to US $0.7345. The dollar fell almost to parity against the Canadian dollar at C$1.0084 before recovering to trade at C$1.0145, according to Reuters data.
A report showing the US core consumer price index was in line with expectations in August had little impact on foreign exchange trading, coming the day after the Fed's decision. Similarly, a report showing US home construction starts at their lowest in 12 years in August was largely ignored.