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Dollar at 2-Year Low Versus Euro After Fed Holds Steady on Rates

The dollar fell to a 2-year low against the euro and pared gains versus the yen after the Federal Reserve held interest rates steady but removed a reference to additional firming in its post-meeting statement.

The dollar fell versus the yen Tuesday after the Emerging Markets magazine quoted China's central bank governor Zhou Xiaochuan as saying that the country did not intend to accumulate foreign exchange reserves further. Most of China's reserves are in dollars.

The euro was down slightly against the dollar, but still in sight of a peak of 1.3340 touched last week, the highest in more than three months.

But the euro was up versus the yen, while sterling erased earlier gains against the dollar and
euro after dovish minutes from the Bank of England's last policy meeting damped hopes of a near-term rate rise.

Sterling was little moved by the country's 2007 budget, which kept growth forecasts unchanged, but announced a surprise cut in the basic rate of income tax.

Analysts said the dollar would likely hover around current levels until the FOMC's rate verdict.

"We expect the Fed to provide some guidance on the subprime market if only because if they ignore it, it will be interpreted as benign neglect," said Michael Woolfolk, senior currency strategist at the Bank of New York.

"Housing prices "continue to weaken but not at an abrupt pace or a pace that could be considered a systemic threat."

There have been concerns that the problems in the subprime mortgage sector could spill over to the rest of the economy.