Dollar Extends Losses as Fed Maintains Low Rates

The dollar fell in choppy trading against the euro Wednesday after the Federal Reserve left interest rates steady, as expected, and said it intends to keep interest rates low for some time.

Low interest rates should ensure that the dollar will remain a funding currency in carry trades, or transactions in which investors borrow in dollars to buy higher-yielding assets.

Investors, however, remained cautious about selling the dollar too much. The Fed said in its statement that while economic activity has picked up, consumer spending has remained constrained by job losses and tight credit.

The euro rose as high $1.4906, but came all the way down to $1.4828. It was last at up more than 1 percent on the day. Against the yen, the dollar was up at near 91 yen .

"What happened here initially is obviously this knee-jerk reaction where people think low rates for a while should keep the dollar weak," said Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington.

"However, the catch to this is the Fed is signaling the U.S. economy is in very, very bad shape. By not removing 'extended period' from the statement, what it is signaling is economic troubles ahead."

Salvaggio said he expects dollar selling and the rally in risky assets to be short-lived.

The ICE Futures U.S. dollar index, which measures the dollar against a basket of six other major currencies, fell for the day to around 75. That was a retreat from Tuesday's one-month intraday high of 76.817.

ECB, US Jobs Awaited

The dollar hit an earlier low versus the euro after a report showing the U.S. service sector grew in October for the second consecutive month helped U.S. stocks extend gains.

"Investors are probably looking at the increase in new orders, which is a leading indicator for economic activity," said Jacob Oubina, currency strategist at Forex.com in Bedminster, New Jersey. "Also, export orders increased, which suggests that dollar weakness is helping boost exports. That's a welcome sign for the economy."

But overall, Oubina said, the report was mixed and "the most worrisome" part is the drop in the employment index, which "doesn't bode well for Friday's nonfarm payrolls report."

U.S. private employers shed 203,000 jobs in October, fewer than a revised 227,000 jobs lost in September The U.S. government will release its monthly nonfarm payrolls data on Friday.

Commodity currencies such as the Australian and New Zealand dollars gained as gold prices hit a record high near $1,100 an ounce and oil rose above $80 a barrel.

The Australian dollar rose to about US$0.90, erasing an earlier drop on the back of an unexpected slide in Australian September retail sales. The New Zealand dollar was up at near US$0.72.

Sterling rallied about 1 percent to around $1.65 even as wary investors await a UK policy decision on Thursday, which could see the Bank of England increasing asset purchases.

The European Central Bank will also make an interest-rate announcement on Thursday.

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