NEW YORK (MarketWatch) -- The dollar declined versus the euro and other major currencies on Wednesday, backing away from the highest in two months, before the Federal Reserve completes its monetary policy meeting and is expected to re-commit to keeping interest rates low for some time.
Though the U.S. central bank's assessment of the economy is likely to be upgraded, record low rates tend to weigh on a currency by reducing the return on assets denominated in it.
"The Fed will have to juggle the obvious improvement of the economy against the need for monetary stimulus to keep the recovery on track," T.J. Marta, chief market strategist at Marta on the Markets, said in a note.
The dollar index (DXY 76.69, -0.27, -0.36%) , which tracks the greenback against a trade-weighted basket of six major counterparts, fell to 76.683, compared with 77.022 in late New York trading on Tuesday, when it touched the highest in more than two months.
The euro bought $1.4576, up from $1.4531 on Tuesday.
The dollar traded at 89.65 yen, compared with 89.64 yen late Tuesday.
The Fed is slated to end its two-day meeting and release a statement at 2:15 p.m. Eastern.
The Fed is widely expected to leave the bank's short-term interest rate target intact at 0% to 0.25%, and unlikely to significantly alter language in its statement promising not to raise rates for a very long time.
However, officials may make some reference to other tools it has to sop up liquidity when it deems appropriate, analysts said. Read bond column about the Fed's options.
"The FOMC is not expected to make any significant changes to its statement today, but this may take some of the steam out of the recent U.S. dollar rebound, given that there has been some increase in rate hike speculation of late," said strategists at BNP Paribas.
The dollar briefly pared losses early in the U.S. session after the U.S. Labor Department said core prices, excluding food and energy, were unexpectedly flat last month, signaling that inflation remains in check.
The U.S consumer price index rose 0.4% in November from a month earlier, pushing it up 1.8% in the past year. November's data marked the first positive year-over-year gain for the CPI since February. See more on CPI.
"While we remain concerned about the prospects for inflation in the out years, the idea that the Fed should move immediately because inflation is, and inflationary expectations are, becoming unhinged remains an unhinged position itself, said Dan Greenhaus, chief economic strategist at Miller Tabak.
A separate report showed U.S. housing starts rose to a 574,000 pace in November. See more on housing starts.
Still another report showed the current account deficit widened in the third quarter. See more on current-account deficit.
That is "reminding everyone that the twin deficits are here to stay" and making the data thoroughly mixed, said Kathy Lien, director of currency research at Global Forex Trading.
U.K., Australia
The British pound (CUR_GBPUSD 1.64, +0.01, +0.55%) rose to $1.6385, up from $1.6267, after data showed U.K. jobless claims unexpectedly declined in November, for the first time since February 2008.
Positive euro zone purchasing managers indexes on manufacturing and services also were generally well received by the market.
The Australian dollar fell 0.6% against its U.S. counterpart, to buy 90.06 U.S. cents, after data showed Australia's economy grew in the third quarter at a slower pace and below market expectations. See full story on Australian GDP.
Deputy Governor of the Reserve Bank of Australia Ric Battellino reportedly said Wednesday that Australian monetary policy has returned to a normal range. That suggests widening bank margins are doing much of the RBA's work for it," wrote Sue Trinh, senior currency strategist at RBC Capital Markets.
