The dollar weakened against the yen and Swiss franc on Wednesday as traders reckoned emergency action taken to stall the fall of the Turkish currency would not be enough to calm jitters over global emerging markets.
As expected, the Federal Reserve pared its massive stimulus by an additional $10 billion, leaving the U.S. currency little changed. In December, U.S. central bank policy-makers surprised some investors by paring its third round of quantitative easing by $10 billion in January to $75 billion.
The greenback initially rose against the yen and Swiss francs— traditional safe haven currencies—after a surprisingly aggressive interest rate hike by the Turkish central bank in a bid to shore up its currency, which had shed over 3 percent since Friday.
But the dollar's gains faded as doubts surfaced whether these emergency efforts could offset the political and economic problems that could bog down faster-growing economies. That view muted any positive impact when South Africa later unexpectedly raised its interest rates.
The South African Reserve Bank became the third key emerging market central bank this week to tighten its policy rate, raising its key rate by half a percentage point to 5.5 percent.
Earlier, the Turkish central bank raised all its interest rates in dramatic fashion with its overnight lending rate jumping to 12 percent from 7.75 percent.
"There are a lot of political and financial fires regionally," said Dean Popplewell, chief currency strategist at Oanda in Toronto. "Emerging market central banks have to be aggressive, but by being so aggressive, that could eventually impact local economic growth, bond yields and stock markets."
Renewed worries about the troubles in emerging markets possibly rippling across the globe spurred fresh selling in Turkish lira, South African rand and revived safehaven bids for the Japanese yen and Swiss franc, analysts said.
In this flight for safety, the dollar slumped against those safehaven currencies but improved against the emerging market currencies.