Dollar slides on weak data; investors await Fed

Stoyan Nenov | Reuters

The dollar fell for a second straight day against major currencies on Tuesday, pressured yet again by unexpectedly weak U.S. economic data as the Federal Reserve started a two-day policy meeting.

The dollar index was on pace for its largest two-day loss since mid-February.

Investors do not expect any change to the Fed's benchmark interest rate, which has been pinned between zero and 0.25 percent for six years. But they do anticipate the Fed dropping the word "patient" from its statement to describe its approach to raising rates later this year.

However, the mixed batch of U.S. economic data in the first quarter and the dollar's strength could delay an interest rate increase many see happening in June.

"U.S. data can be best described as patchy. There is the potential here for disappointment from the Fed," said London-based Trevor Charsley, FX trading specialist at AFEX, a global payments solution provider.

In late trading, the dollar index was slightly down at 99.547. It has fallen 0.8 percent the last two days, on track for its steepest two-day fall in about a month.

The dollar fell after U.S. housing starts plunged to their lowest in a year. Groundbreaking tumbled 17 percent to a seasonally adjusted annual pace of 897,000 units, the lowest since January 2014.

Will dollar be addressed in Fed statement?
Will dollar be addressed in Fed statement?

The data came a day after a report showed U.S. manufacturing output fell in February for a third straight month.

"We see the Fed still being data-dependent," said Mark McCormick, currency strategist, at Credit Agricole in New York.

Read MoreFX strategist: Dollar correction coming

"We expect a lift-off in rates possibly in September, not June, and the dollar's strength, which acts like a rate hike, has helped the Fed take its time in raising rates."

The euro, meanwhile, rose 0.3 percent against the dollar to $1.0599. The single currency had come under pressure after the European Central Bank began a bond-buying program last week that will pump more than one trillion euros into the euro zone economy.

But the euro won some relief after the soft U.S. data cooled the dollar's rally.

The dollar was flat against the yen at 121.33 yen, stuck in a narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded a two-day meeting on Tuesday, standing pat on monetary policy and keeping its massive stimulus in place.