The dollar wallowed near a two-month low against a basket of major currencies on Wednesday as the market hedged the risk that the Federal Reserve might adopt a more dovish tone in statements following the two-day policy review. The dollar index last stood at 96.141. On Tuesday it fell as far as 96.011, reaching a low last seen on March 5.
The key risk for the dollar is the Fed's post-meeting policy statement due at 1800 GMT. The Fed is widely expected to keep policy unchanged and the focus will be on its economic assessment. The central bank is considering monetary policy at a time when the US economy has hit a soft patch, blamed largely on harsh winter weather, a strong dollar and disruptions at West Coast ports.
"Our expectation is the statement will acknowledge the Q1 data weakness but try and look through it, and that there will be no change to the characterisation of inflation prospects," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
"The acknowledgement of the weak data might be at the margin, dollar negative. But the bar for hawkish surprises is now much lower than it was two or three weeks ago," he added. Just hours before the Fed releases its statement, the market will get an early read of how the US economy fared in the first quarter. Economists expect the annualised pace of growth to have slowed to 1 percent, from 2.2 percent.
The euro last traded near $1.0968, easing 0.1 percent on the day. On Tuesday, the euro had set a three-week high of around $1.0991, coming within a hair's breadth of $1.1000. The dollar held steady versus the yen at 118.87 yen, hovering close to the bottom end of this month's 118.525-120.845 range.
The Australian dollar slipped 0.5 percent to $0.7988, giving back some of the gains made on Tuesday when it soared more than 2.1 percent for its biggest one-day rise since November 2011. The Australian dollar's sharp gains on Tuesday came on the back of growing expectations of easier policy in China and the recovery in iron ore prices over the last week, said Greg Moore, senior currency strategist at RBC Capital Markets. Aussie bulls also found some comfort after the head of Australia's central bank refrained from talking down the currency at a speech on Tuesday.
"In the near term, sentiment in the US dollar will be key for the direction in the Australian dollar," said Roy Teo, senior FX strategist for ABN Amro Bank in Singapore, adding that the Aussie could face some profit-taking in the short term ahead of the Australian central bank's policy meeting on May 5.