The dollar fell against the euro and yen on Wednesday after the Federal Reserve kept interest rates steady and said price pressures were likely to moderate.
The euro, which had climbed above the psychologically important $1.3000 level earlier in the session, extended gains after the central bank's announcement.
Earlier in the session, the dollar had been bolstered by an above forecast reading of U.S. economic growth in the last three months of 2006, but dipped into the red after the National Association of Purchasing Management-Chicago said business activity in January was the lowest since April 2003.
"There was some expectation after today's GDP numbers that the Fed's statement was going to be a little more hawkish, but if anything, they seem to be turning more dovish," said Gregory
Salvaggio, currency trader at Tempus Consulting in Washington, D.C.
"This statement combined with the PMI numbers from earlier today, are helping push the dollar lower," he added.
In its policy statement, the Fed did say recent data suggests "somewhat firmer" growth and mentioned signs of stabilization in the U.S. housing market.
But some economists have said solid housing data of late may be tied to unseasonably warm weather and strategists say the economic picture and what it means for currencies in the longer run is still far from clear.
"The jury is still out on how much of a rebound we're experiencing. We're on the edge here: easing's been priced out but chances of a hike haven't been priced in," said Firas Askari, head of FX trading at BMO Capital Markets in Toronto. "We really need to see more data to see which way it's going to go."