Dollar Rises as Fed Looks Toward End of Easing

Getty Images

The U.S. dollar reversed early losses and rose against the euro and yen on Wednesday after the Federal Reserve's Federal Open Market Committee said it sees diminished downside risks to the outlook for the economy and the labor market.

The FOMC also said it would keep up its current $85 billion a month in bond purchases with no indication it would scale back.

Trading was volatile as had been expected, with the euro initially climbing to a session high against the dollar after the announcement before swinging wildly into losses.

The dollar gained more ground after Federal Reserve Chairman Ben Bernanke said the U.S. central bank's policy setting committee sees a likely reduction in bond purchases this year if economic forecasts come in as expected.

(Read More: Taper Tipoff? Bernanke Hints Easing End Is Nearing)

"The markets are reacting to the more positive economic assessment in the statement, notably the comment that economic risks have diminished," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. "I think it's being seen as a signal that the Fed is close to tapering."

The euro last traded at $1.3266, down 0.9 percent on the day, and well off the session peak of $1.3414. The dollar was at 96.57 yen, up 1.3 percent, with the session peak at 96.93 yen.

Economists expect interest rates to stay on hold until 2015, but the view in financial markets of when the Fed would tweak policy had shifted forward since Fed Chairman Ben Bernanke fired up speculation last month that the central bank could soon curb its asset buying.

In fresh quarterly projections, 14 of the 19 members of the Fed's policy-setting committee said they did not think it would be appropriate to raise rates until some time in 2015.

The Fed repeated on Wednesday that it will not lift interest rates until unemployment hits 6.5 percent or lower, provided that the outlook for inflation stays under 2.5 percent. The jobless rate was 7.6 percent in May.

But in a slight upgrade to their projections, officials forecast unemployment to average 6.5 to 6.8 percent in the fourth quarter of next year, and 5.8 to 6.2 percent in the final three months of 2015.

"The forecasts suggested that the unemployment rate will fall to 6.5 percent in 2014, which means that the Fed could hike rates sooner than expected, possibly as early as the first quarter of 2015," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "And that's positive for the U.S. dollar."

(Read More: This Currency Could Climb on Fed Exit News)

Earlier in the day ahead of the Fed announcement, the dollar had fallen to a four-month low against major currencies on Wednesday. Speculation that the Fed might begin slowing its pace of asset purchases had triggered a recent sell-off in global stocks and sent the safe-haven Japanese yen up more than 5 percent against the dollar so far this month.

Those moves were immediately reversed after the announcement.

The dollar index, which measures the greenback against a basket of currencies, rose 1 percent and touched a one-week high of 81.469 after earlier hitting a four-month low of 80.498.

The euro edged up 0.4 percent to $1.2829 yen. Some US$1.94 billion in yen changed hands in the global session and US$3.2 billion in euros.

(Read More: Easing of Slump Won't Halt Euro's Decline)

The dollar's strength was broad-based with the U.S. currency posting a 1.1 percent gain against the Swiss franc, while sterling fell 0.9 percent against the dollar, the Australian dollar slid 1.6 percent and the New Zealand dollar fell 1.4 percent.