The U.S. dollar floundered at three-week lows against a basket of major currencies on Thursday, after the Federal Reserve did little to alter the perception that it remained deeply committed to a dovish policy stance.
While the Fed's policy meeting turned out to be a bit of an anti-climax to many market players, a fall in euro zone sovereign yield spreads overnight also helped to push the euro up above its peak last week to test major resistance levels.
The dollar index stood at 79.026, having fallen as low as 78.995 after Fed Chairman Ben Bernanke said the central bank would not hesitate to launch another round of bond buying if the economy needed it.
"Despite its projections that GDP growth will pick up, the FOMC expects unemployment to remain well above target by the end of 2014. This means that there is scope for further monetary easing down the road, especially if the recovery falters," said Philip Marey, strategist at Rabobank.
Fresh projections released by the Fed also showed that support for a rate hike before 2014 among policymakers did not increase from January, disappointing dollar bulls who had hoped for the possibility of an earlier exit from easy policy.
The dollar's fall saw the euro hit a three-week high of $1.3234, near major resistance around $1.3240, which is a 50% retracement of its decline from late Feb to Apr. 16 and a 61.8% of its decline from the March 27 peak to the same low.
A break of that level could bring into focus a band of resistance at $1.3370/90 seen in late March and early April. It last stood at $1.3227.
Debt yields of Spain and France eased sharply from recent highs on Wednesday, although Italian debt had less luck due to caution ahead of a debt auction by Rome on Friday.
The dollar also eased 0.2% against the yen to 81.17 yen, though it stayed in a 80.30/81.80 range seen in the past few sessions ahead of the BOJ's policy meeting on Friday.
The Japanese currency is unlikely to make much headway ahead of the meeting. Sources familiar with the central bank's thinking, said the BOJ is likely to ease monetary policy on Friday by boosting asset purchases by up to 10 trillion yen ($123 billion).
Some traders feel the market is already heavily short the yen as further BOJ easing has been hyped in the market for many weeks and there is room for the yen to rebound.
The Bank of Canada last week signaled it may withdraw stimulus while minutes of the Bank of England's policy meeting also suggested another asset purchase is no longer on the horizon.
The Canadian dollar indeed extended its rally to hit a fresh seven-month peak against the greenback hit on Wednesday, with the U.S. dollar falling as far as C$0.9822.
Sterling held near a 7-1/2 month high at $1.6183 even after data showed Britain's economy falling into its second recession since the financial crisis.
Meanwhile, the New Zealand dollar eased slightly to $0.8160 , after RBNZ Governor Alan Bollard said the local dollar was still high despite recent falls in commodity prices, and warned that would influence future policy.
Earlier it had popped to a high of $0.8176 as the markets covered short positions after the Reserve Bank of New Zealand kept rates unchanged at a record low 2.5% as expected.
Rate markets were now pricing in a one-in-five chance of a cut at the next RBNZ meeting.
The Australian dollar was spared much of the drama, holding at $1.0361. It has risen in the past two sessions from a low of $1.0247, hit after tame inflation data cleared the way for a rate cut next week.
