Although the Federal Reserve Open Market Committee decided to keep interest rates unchanged at zero to 0.25 percent as expected, the greenback jumped across the board on Wednesday as the U.S. central bank indicated that it would be prepared to buy long-term U.S. government debt if that would help improving credit market conditions.

After a 2-day meeting, the central bank's policy-making panel announced to leave target range for overnight interest rates unchanged as December. In a statement issued at the end of the meeting, the committee also repeated that it thought rates could stay unusually low for some time. Although Fed did not indicate any immediate intention to buy Treasury securities, the committee is prepared to purchase longer-term bonds if circumstances indicate that such actions would be particularly effective in improving conditions in private credit markets. (Fed had said in last meeting that it was studying that option). The panel voted 8-1 to make the decision with Richmond Fed President Jeffrey Lacker dissented, saying he thought the Fed should immediately move to a program to buy government Treasury securities.

The Fed is also making effort to ensure a year-long recession does not lead to a long period of deflation which could undermine business activities. The committee anticipates that a gradual recovery in economic activities will begin in latter part of 2009 but overall downside risk remains.

Federal Reserve also said that if needed it would continue to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and the Fed stands ready to expand the quantity of such purchases plus the duration of the program.

The single currency dropped quickly from around 1.3282 (before the decision) to 1.3102 shortly after the announcement, cable also slipped to 1.4180. Against the Japanese yen, dollar surged to 90.79 before easing whilst Swissy rose to 1.1565 in late New York.

Earlier, euro and sterling strengthened versus the greenback to 1.3335 and 1.4377 respectively on the back of rising equities and easing risk aversion, however, both currency pairs reversed course after FOMC statement.

Elsewhere, New Zealand dollar tumbled as the Reserve Bank of New Zealand slashed benchmark rates to 3.5 percent from 5.0 percent, the lowest in 10 years, also well below expectation to lower 100 b.p. to 4.0 percent. Kiwi plunged around 0.5300 to below 0.5200 after the cut.

Economic data to be released on Thursday include Japan's retail sales, U.K. Nationwide house price, German unemployment rate, EU business climate, U.S. durable goods orders, initial jobless claims and new home sales.