The dollar fell broadly on Wednesday as firmer equity and commodity prices buoyed demand for the euro and perceived riskier currencies, while traders braced for a policy decision from the Federal Reserve.
The decision at 1915 GMT is the key focus for the day, with all eyes on whether the U.S. central bank will uphold its pledge to keep the Fed funds rate low for an extended period even as the economy shows signs of improving.
Analysts said the dollar may face more selling pressure if an unchanged statement gives a further lift to stocks.
It is likely to be risk-positive if the Fed suggests rates will stay low but acknowledges that the economy is doing better. This would give a boost to equities and be negative for the dollar, said Naeem Wahid, currency strategist at Lloyds Banking Group.
Meanwhile, surveys revealing a bigger-than-expected expansion in the euro zone and the UK services sectors encouraged the view that the global economy is recovering.
The improvement in the services PMI data out of the euro zone and the UK has helped sustain the 'risk-on' sentiment, Wahid said.
The euro pared some gains, however, on news that Fitch ratings agency downgraded Ireland's sovereign rating to 'AA-' from 'AA+' with a stable outlook.
At 1226 GMT, the euro EUR= was up 0.3 percent on the day against the dollar at $1.4761 while the dollar index .DXY fell 0.3 percent to 76.141.
This pulled the dollar away from a one-month high of 76.817 hit on Tuesday, with risk appetite stoked by a more than 1 percent rise in European shares .FTEU3 and by oil prices CLc1 moving above $80 per barrel.
The yen was also dented by the improvement in risk sentiment, with the euro EURJPY=R up 0.9 percent at 134.10 yen and the dollar JPY= gained 0.5 percent to 90.84 yen.
Among higher risk currencies, the Australian dollar rose 0.5 percent to $0.9071 AUD=D4, buoyed as gold prices XAU= hit a record high and erasing an earlier fall on the back of an unexpected slide in Australian September retail sales.
Sterling GBP=D4 gained 0.6 percent to $1.6512 even as wary investors await a UK policy decision on Thursday, which could see the Bank of England increasing asset purchases. [BOE/INT]
DATA, FED EYED
Before the Fed statement, traders awaited data on U.S. private sectors jobs at 1315 GMT, considered a prelude to crucial non-farm payrolls on Friday, and a key U.S. services sector survey at 1500 GMT. ECON
Analysts said the upcoming data and events are likely to keep currency trading nervous, particularly given that policy decisions are also scheduled from the Bank of England and the European Central Bank on Thursday.
Following unwinding in high-yielding currencies including the Aussie and euro in recent days, however, most believe any indication Fed rates will stay low may prompt investors to take on riskier positions, which may push the dollar lower.
The Fed is unlikely to offer any hints into the timing of an exit strategy and eventual rate rises, which may help stocks to rise and consequently boost euro/dollar, said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
Still, analysts said barring a hawkish Fed and stellar U.S. payrolls, a big rise in the euro beyond the mid-$1.48 region was unlikely given resistance building around that level. The 21-day moving average lay around $1.4843 while the 14-day moving average was around $1.4857.
The euro recovered from a one-month low around $1.4623 hit on Tuesday, after poor earnings results from European banks and European Commission estimates of bank losses had renewed anxiety over the sector's health.