The US dollar gained against its major counterparts on Monday after Federal Reserve chairman Ben Bernanke indicated that further monetary stimulus was ‘highly unlikely’ to occur.
The greenback was up against the euro during early European trading, with EUR/USD falling to a three-day low of 1.4271.
On monetary policy, the Federal Reserve left rates unchanged signaling its intention to end QE2 as scheduled while maintaining its policy of reinvesting maturing securities without giving any hint of QE3.
“We do not question the possibility that conditions could become so unfavourable that the economy might need an extra something, but would humbly suggest that if so, QE is not the answer,” said Societe Generale in a note.
However, the Federal Reserve noted that the US economy is slowing down in mid-2011. The labor market is doing worse than anticipated with the housing market continuing to struggle, and consumer spending remained constrained.
As a result, the Fed lowered the 2011 US GDP growth projection by 0.4 percentage point and raised the unemployment rate projection by 0.2 percentage point.
Still, the Federal Reserve remained upbeat for the long-term. It said the economic recovery is continuing at a moderate pace.
Moreover, the slowdown is due to temporary factors like supply chain disruptions from Japan's natural disasters and higher prices of food and energy.
The greenback also traded higher against the Japanese yen, with the pair USD/JPY touching a four-day high of 80.64.
Meanwhile, British pound sterling widened losses against the dollar, to hit a 3-month low on speculation that the Bank of England (BoE) is inclined towards implementing further quantitative easing measures.
The sterling slipped to its weakest since April 1 against the greenback, with GBP/USD falling 0.3 percent to trade at 1.6011.
The central bank kept the rates unchanged at 0.5 percent and some of the policymakers believed that further monetary easing may be needed amid weakened growth outlook.
Adam Posen, one of the members of BoE’s monetary policy committee, voted for an additional quantitative easing of 50 billion pounds.
The dollar was higher against the safe haven currency, Swiss franc, with USD/CHF easing up 0.15 percent to hit 0.8402.
The Australian dollar was also lower against the dollar, after a report showed that manufacturing activity declined in China in June. AUD/USD fell 0.37 percent to hit 1.0533.
HSBC manufacturing PMI in China dropped from 51.6 in May to 50.1 in June, mainly driven by continued inventory cuts and weaker exports.
The New Zealand dollar also traded lower against the greenback, with NZD/USD dipping 0.0.04 percent to hit 0.8140. However, the Canadian dollar was higher versus the US dollar, with USD/CAD shedding 0.15 percent to trade at 0.9720.
The dollar index, a measure of the performance of the greenback against a basket of six currencies, was up 0.45 percent.