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Dollar index up after Fed announces taper

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The dollar rose to its strongest level in six months against a basket of currencies on Wednesday, after the Federal Reserve announced it will cut its asset buying program by another $10 billion. The greenback was also bolstered by earlier data that fanned expectations of a recovery gaining momentum.

Earlier data revealed the the U.S. economy expanded by 4 percent in the second quarter, advance data from the Commerce Department showed, beating Wall Street estimates. Although ADP private payrolls data fell short, investors are holding fire until the nonfarm payrolls report confirms the trend on Friday.

Against a basket of major currencies, the dollar touched a high of 81.47, its strongest level in six months. The dollar hit a three-week high just below 103 yen.

The euro fell below $1.34 for the first time since last November before German inflation data that was likely to add to the case for the European Central Bank pumping more money into a moribund economy. The first batch of regional German data showed inflation falling well below 1 percent even in the euro zone's strongest economy just as prices in Spain, Greece and Portugal are falling.

The Fed's statement will be looked to for any hint of when U.S. interest rates could be raised next year. The central bank is cut its monthly bond-buying program by another $10 billion on Wednesday.

Worries about tension in Ukraine and concerns that sanctions against Russia would have a negative economic impact on Europe have weighed on the euro recently, said Bart Wakabayashi, head of foreign exchange for State Street Global markets in Tokyo.

"This is something that everyone has been saying for six months or so now, but there has recently been some confirmation of that," Wakabayashi said, adding that such issues were unlikely to go away soon.

A survey released late last week had shown that German business sentiment fell to its lowest level in nine months in July, adding to signs that Europe's largest economy is slowing and suggesting that firms are worried about the crises in Ukraine, Iraq and Gaza.

--By Reuters, with CNBC.com.

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