The dollar fell to a two-week low versus the euro after the Federal Reserve’s decision to hold key interest rate unchanged at 2 percent on Wednesday. The statement failed to give a strong enough signal that the Federal Reserve will start reversing the most aggressive series of rate cuts in two decades.
In Fed's statement, although concerns about inflation remain high, it also said price pressures are expected to moderate this year. The European currencies strengthened against the dollar as traders eased their expectation that the U.S. central bank will raise the target lending rate by a quarter- percentage point in September whist the European Central Bank has flagged a rate hike next month due to surging energy and food prices.
The dollar dropped from a session high at 108.44 to 107.66 and from 1.0450 to 1.0342 versus the Japanese yen and Swiss franc respectively after the release of Fed’s statement. It also retreated to 1.5687 and 1.9770 against the euro and British pound respectively around New York closing. The Japanese yen decreased against the euro and touched 169.16, the weakest since the 15-nation currency's debut in 1999.
Futures on the Chicago Board of Trade show a 21 percent chance the central bank will hold the target rate for overnight lending between banks steady at the September meeting, compared with 10 percent odds yesterday. There's a 67 percent chance the Fed will sustain borrowing costs at the next meeting in August.
Fed Chairman Ben S. Bernanke and his colleagues refreshed their forecasts at their two-day meeting, reporting that the economy continues to expand. At the same time, crude oil prices have almost doubled in the past year and the cost of commodities from wheat to tin jumped to unprecedented levels.
On Thursday, economic data releases include New Zealand’s current account, German import price index, U.S. GDP data, PCE, Jobless claims, personal consumption, existing home sales and Midwest manufacturing.