Dented Expectations of Fed Tightening Knock Dollar

Sha Ying | CNBC

The dollar tumbled against the euro and yen on Wednesday after the minutes from the Federal Reserve's latest policy meeting dented expectations of a near-term reduction in stimulus by the U.S. central bank. The dollar extended losses after Ben Bernanke said that highly accommodative monetary policy was needed for the "foreseeable future."

The dollar had rallied to three-year peaks against a basket of major currencies on Tuesday on bets the Fed may start slowing its $85-billion-a-month bond purchases as early as September, but the minutes suggested that might not be a sure bet.

(Read More: Fed Officials Showed Worry About Easing Policy)

Even as consensus built within the Fed in June about the likely need to begin pulling back on economic stimulus measures soon, many officials wanted more reassurance the employment recovery was on solid ground before a policy retreat.

"The minutes were not as hawkish as expected," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, N.J.

The euro rose 0.8 percent to $1.2986, according to Reuters data, while the dollar fell 1 percent to 99.65 yen, near the session low.

The Fed's bond-buying program, known as quantitative easing, has pressured the dollar in recent years because it equates to printing money and erodes the value of the currency.

Hopes the Fed may slow its purchases grew after Fed Chairman Ben Bernanke said in June that the central bank would likely curtail bond purchases later this year and bring them to a halt by the middle of next year.

(Read More: In the Race to the Bottom, US Dollar Falls Behind)

Analysts at Action Economics said the minutes injected uncertainty back into the markets rather than providing clarity, as reflected by the gyrations in asset prices on the headlines.

At an afternoon speech, Bernanke said the 7.6 percent unemployment rate probably "overstates the health of the labor market" and that inflation remains below the Fed's 2 percent target. Moreover, fiscal policy remains "quite restrictive," Bernanke said.

"Highly accommodative monetary policy for the foreseeable future is what's needed," he said.

(Read More: Bernanke: Highly Accommodative Policy Needed for 'ForeseeableFuture')

The dollar index, which tracks the greenback against a basket of six currencies, was last down 1.4 percent at 83.435, moving quickly away from a three-year high at 84.753 touched on Tuesday.

Despite the weakness, some analysts believe the U.S. dollar looks poised to resume its rally on contrasting monetary policy stance between the Fed and other major central banks.

(Read More: ECB Says Asmussen Didn't Aim to Give 'Extended Period' Guidance)

They said discussions about the Fed have focused squarely on the timing of a reduction in stimulus, while central banks in the euro zone, UK and Japan remain biased for further easing.

—By Reuters