The dollar gained versus the yen and pared losses against the euro on Wednesday after the Federal Reserve said economic activity is "levelling out," suggesting the economy is through the worst of the recession. The Fed also said it would extend by one month through October the duration of a program to buy long-term government securities but would not increase the amount of purchases.
Analysts viewed this as a sign the central bank thought the economy was improving but said its move to extend the time-frame of asset purchases signalled the economy remains vulnerable. "The dollar was boosted ... as people are focusing on the somewhat more hopeful outlook," said David Watt, a senior currency strategist at RBC Capital Markets in Toronto.
"But the Fed won't be moving the punch bowl away soon," he added. "That reflects some caution, but it's hopeful that they didn't expand the program. They sort of split the difference - they won't expand the program but recognise that the economy still has vulnerabilities."
Adding to that view, the Fed also held interest rates near zero as expected and said they would likely stay there for an extended period. The dollar was 0.2 percent higher at 96.08 yen after swinging between 96.75 and 95.13 yen in the session. The euro was still up 0.3 percent on the day at $1.4198, but below $1.4231 where it traded before the Fed's announcement.
Bank of New York-Mellon currency strategist Michael Woolfolk said dollar gains were capped by the Fed's extension of the asset-purchase deadline. The Fed slashed interest rates to a range of between zero and 0.25 percent in December and has pumped money rapidly into the economy to stimulate economic activity in the worst recession in decades. Part of that includes $300 billion set aside to buy long-dated US government bonds.
Stocks extended gains and US Treasury prices tumbled as the Fed statement gave a slightly more upbeat but guarded assessment of the US economy, saying for the first time that activity is "levelling out" but was likely to remain weak "for a time." The focus on the Fed overshadowed a US Commerce Department report that indicated the US trade deficit widened in June to $27 billion.
Also on Wednesday, Norway's central bank held its main interest rate unchanged at a record low of 1.25 percent, in line with analyst forecasts as the Norwegian economy has shown signs of stabilisation. The dollar was 2 percent lower against the Norwegian crown, while the euro fell 1.9 percent against the Norwegian currency.