Dollars whipsaws after the Fed leaves rates unchanged

Key Points
  • Outgoing Federal Reserve Chair Janet Yellen left interest rates untouched at 1.25 to 1.5 percent as she presided over her last Fed meeting on Wednesday.
  • The dollar slipped to a one-week low of 89, before recovering up 0.12 percent to 89.27.
Dollar bills with Euro notes
Dan Kitwood | Getty Images

The dollar index bounced back from one week lows after the Federal Reserve announced it is keeping interest rates untouched.

The central bank also gave an upgraded assessment of the U.S. economy, noting it expects inflation to reach 2 percent target over the "medium term."

Outgoing Federal Reserve Chair Janet Yellen left interest rates untouched at 1.25 to 1.5 percent as she presided over her last Fed meeting on Wednesday. Jerome Powell was unanimously elected as chair and will be sworn in Feb. 5.

Against a basket of rivals, the dollar fell 0.18 percent to 89.00, before recovering up 0.13 percent to 89.28. The last time the dollar fell below 89, was Jan. 26, when it hit a low of 88.438, its lowest level since 2014.

The dollar gained 0.47 percent to 109.32 , shortly after the Fed announcement.

The greenback also gained against the British pound, up 0.11 percent to 1.416, and the euro. The euro last traded down 0.08 percent at 1.239.

Last week, the European Central Bank kept policy unchanged and fended off discussions of winding down its massive stimulus program any time soon. Those comments haven't prevented some investors from expecting an interest rate hike in the first quarter of 2019.

Underlying inflation, excluding food and energy, - a key measure studied to gauge price pressures in the 19-bloc zone - actually accelerated to 1.2 percent in January from 1.1 percent a month earlier but broader price gauges slowed.

"From all accounts, Europe continues to do well, as (is) evident from a strong structural balance, and that has kept investors happy to buy eurozone assets," said Robin Winkler, an FX strategist at Deutsche Bank in London.

European funds have seen more than $22 billion of equity inflows so far in January, after cornering a third of all flows last year across major regions, according to flows data indicating the underlying optimism about the outlook.

Tuesday's preliminary data showed the euro zone economy expanded at its fastest rate in a decade in 2017, with sentiment remaining high at the start of 2018 despite a slight dip from a 17-year peak.

Despite the near 4 percent rally in the euro so far this month, the currency remains broadly undervalued on a trade-weighted basis on long-term averages.

On Wednesday, the single currency climbed half a percent to a high of $1.24630 after the inflation data.

State of the Union

The dollar fell by a quarter of a percent after U.S. President Donald Trump's first State of the Union address failed to offer any comfort to ailing dollar bulls.

Trump called on the U.S. Congress to pass legislation to ensure at least $1.5 trillion in new infrastructure spending and urged lawmakers to work toward bipartisan compromises, but he pushed a hard line on immigration.

The yen slipped briefly after the Bank of Japan increased its buying of medium-term Japanese government bonds (JGBs) in a move seen as a warning shot against further rises in bond yields.

--CNBC's Chloe Aiello contributed to this report.