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Dollar Treads Choppy Waters as Fed Stays Course

The U.S. dollar weakened in choppy trading on Wednesday after the Federal Reserve cited risks to U.S. growth from austerity in Washington and maintained its plan to buy bonds in order to keep borrowing costs low to prop up the economy.

After the euro pushed to a two-month high against the greenback following disappointing economic data earlier on Wednesday, the Fed's statement weakened the euro zone currency, albeit briefly.

But the dollar spiked higher against the yen, climbing from an early two-week low, before slipping back.

(Read More: Has the Yen Hit Bottom Against the Dollar Already?)

In its statement following a two-day meeting, the Fed reiterated it will continue to buy $85 billion worth of bonds each month to support a moderately expanding economy that still has too high an unemployment rate.

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Only a month or so ago, investors expected the Fed to start scaling back asset purchases.

(Read More: Fed Keeps Interest Rates Low, Continues Bond Buying Program)

"The talk of tapering (bond purchases) has not only been pushed to the back burner but pushed off the stove altogether. It's not something we're likely to see until 2014," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

In late New York trade, the euro maintained a 0.15 percent advantage on the greenback, trading at $1.3186. The May Day holiday kept most of Europe's markets closed.

The European Central Bank is expected to cut the main euro zone interest rate at its monthly meeting on Thursday as the bloc's economy has weakened further.

(Read More: Why an ECB Rate Cut Could Be Too Little, Too Late)

"Going into the ECB meeting, it might cut its policy rate and it might give some forward guidance, which is the most you could expect to get. Those looking for quantitative easing from the ECB will be disappointed," said John Canally, investment strategist and economist at LPL Financial in Boston.

The U.S. dollar slipped 0.09 percent to trade at 97.32 yen.

Immediately following the Fed's statement the dollar had surged to a New York-session high of 97.54 yen before the gains eroded.

Over the last three trading days, the yen has found support around 97.18, the 38.2 percent Fibonacci Retracement level from the April 4 low to the April 11 high, according to Reuters data.

The dollar index, which measures the U.S. currency's value against a basket of currencies, dropped as low as 81.331, its weakest since Feb. 25. It was last at 81.606, down 0.17 percent.

Data released on Wednesday showed U.S. companies hired the smallest number of employees in seven months in April while manufacturing growth slowed.

Another report showed U.S. construction spending dropped to a seven-month low in March. Investors will get further clues about the health of the economy when the government releases its nonfarm payrolls report for April on Friday.

Economists are looking for job growth of 145,000 last month, up from 88,000 for March.

The pound spiked to a session high of $1.5604 after the Fed's decision, its best showing since mid-February. Earlier strength for sterling was underpinned by a better-than-expected U.K. manufacturing survey. It last traded at $1.5561, up 0.19 percent on the day.

The Australian dollar fell 0.9 percent to $1.0276 after data showed growth in China's manufacturing sector unexpectedly slowed.

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