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Dollar slips after Fed more dovish than expected

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The dollar sank to its weakest level in three weeks on Thursday after a cautious message from the Federal Reserve stopped well short of the aggressive signal of prospective higher interest rates expected by some in the market.

In Europe, meetings of the Swiss and Norwegian central banks were the early focus. The euro traded at its highest level in 10 days against the dollar while sterling inched up to a new 5-year high of $1.7018 and the New Zealand dollar soared to a record high.

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New projections suggested the Fed saw rates rising more in 2015 and 2016 than it had previously forecast, but officials lowered their long-term rate target. The Fed also sounded comfortable with the inflation outlook despite recent signs of a pick-up in price pressure.

Fed chief Janet Yellen said there had been "a slight decline of projections pertaining to longer-term growth" and officials lowered their view of the expected long-term federal funds rate from 4 percent to 3.75 percent. U.S. Treasury yields fell, with the benchmark 10-year rate dropping to 2.582 percent from the U.S. close of 2.615 percent.

"U.S. dollar weakness is likely to be sustained unless we get a sea change in the communique coming from the Fed, so upside risks look likely for euro, kiwi and Aussie," said Sue Trinh, currency strategist at RBC Capital Markets.

The dollar index traded at its lowest since May 27, down almost 0.5 percent on the day at 80.23. Meanwhile, a further rise in oil prices underlined that investors remain deeply concerned by events in Iraq.

The franc inched up to a session high of 1.2173 francs per euro after the Swiss National Bank kept all of its policy parameters steady. The yen was virtually flat against the dollar in early European trade, trading under 102 yen. The euro was slightly higher near $1.36 after it touched $1.3600 on Wednesday.

Read MoreAre the Australia dollar bears weakening?

Another cloud looming on the horizon and sapping investors' risk appetite was Argentina's threat of default on its debt. On Wednesday, that country's government called it "impossible" to pay bond service due on June 30, citing a U.S. court decision earlier in the day.

--By Reuters. For more information on foreign exchange prices, please click here.

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