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Dollar extends gains vs euro, yen after GDP data

Sha Ying | CNBC

The dollar extended gains against the euro and yen on Wednesday, hitting session highs after data showed the U.S. economy grew faster than expected in the second quarter.

The U.S. economy expanded 1.7 percent in the quarter, surpassing expectations for a 1-percent rise.

The dollar hit the day's highs of 98.52 against the yen and was last at 98.33 yen, up 0.3 percent. The euro, meanwhile, fell to session lows of $1.3213 and last traded at $1.3231, down 0.2 percent.

Earlier, the dollar fell to a one-month low against the yen on Wednesday on caution before a Federal Reserve policy statement which may hint at when stimulus will be reduced but could also push back bets on when interest rates will rise.

The dollar index, which tracks the dollar against a basket of major currencies, was 0.3 percent higher at 82.11. The dollar's direction is likely to be set by how markets interpret the Fed's post-meeting statement, even though it is expected to keep buying $85 billion of bonds a month for now.

(Read more: 'The Fed has to taper,' says Art Cashin)

Some in markets speculate the central bank could adjust the economic thresholds it has laid out to guide expectations of when rates will rise, which analysts said would hurt the dollar.

But the dollar would benefit if the statement focuses on plans to "taper" asset purchases.

"The market might be expecting something too dovish from the Fed and this could give the dollar some support," said Paul Robson, currency strategist at RBS, adding that month-end flows may also drive currency direction on Wednesday.

The Fed statement is due at 1800 GMT but, unlike after the last policy meeting, Chairman Ben Bernanke will not hold a news conference to give any further guidance.

Many traders said they were inclined not to have any significant dollar positions before the Fed decision, which one London-based trader described as "a bit of a lottery". Month-end flows influence currency movements, however.

The euro was steady at $1.3253 but stayed near a six-week high of $1.33025 hit on Tuesday.

Aussie Falls Further

The Australian dollar hit a three-year low of A$1.4716 per euro, extending Tuesday's falls after comments from the head of the central bank were seen as increasing the chances of a rate cut next week. It also fell 0.3 percent against the U.S. dollar to $0.9031.

(Read more: How low must the Aussie go before the RBA backs off?)

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The Swedish crown fell further after Tuesday's weak growth data was seen increasing the risk of a rate cut. The euro hit a two-week high of 8.7260 crowns.

Analysts at Danske Bank, however, said the euro had been "significantly overbought" relative to their 8.56 crown fair value estimate, based on short-term interest rate spreads.

They said the data was unlikely to be weak enough to trigger a rate cut in Sweden, adding a dovish message after Thursday's European Central Bank meeting "should weigh on the euro".

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