EUROPE MARKETS: Dollar Turns Lower After Fed Is Read As Adopting A More Dovish Tone

Dollar index trades at its lowest level since June 2016, following U.S. central bank's policy update

The U.S. dollar fell on Wednesday, erasing an earlier gain after the Federal Reserve was seen as striking a somewhat cautious note on inflation, which is seen as bearish for greenback.

The U.S. central bank said inflation was "running below 2%" (http://www.marketwatch.com/story/fed-to-wind-down-bond-holdings-relatively-soon-2017-07-26) instead of "running somewhat below 2%," as it had in its June statement. The Fed's preferred inflation gauge, the personal-consumption index, or PCE index, has tapered off to 1.4% growth over 12 months from a five-year high of 2.1%.

The Fed also indicated, as expected, that it would start to wind down its bondholdings "relatively soon" and kept interest rates unchanged, as had been widely expected.

The ICE U.S. Dollar Index , which tracks the greenback against a half-dozen other major rivals, fell 0.2% at 93.81. The index was at its lows of the session, as well as its lowest level since June 2016. With the day's move, it turned lower for the week, building on a 1.4% decline seen last week.

Before the announcement, it had risen as high as 94.29.

"The market is trying to gauge how concerned the Fed is, or is not, about not hitting the 2% target. The perception of its concern changes over time, and in this case that is having a negative impact on the dollar," said Eric Stein, a vice president at Eaton Vance Management who covers the Federal Reserve. "There's nothing that really stands out in this statement, but between this and [Fed Chairwoman Janet] Yellen's previous comments, it seems like there's some concern on the inflation side."

The euro bought $1.1701, compared with $1.1630 before the decision, and a move of 0.4% from its late Tuesday price of $1.1649. The shared currency has been on a strong uptrend throughout 2017, having risen more than 10% against the dollar thus far this year, nearing levels last seen in August 2015.

The pound fetched $1.3095, recovering from an intraday low of $1.3000 after U.K. gross domestic product for the second quarter expanded by 0.3%, meeting widely held expectations. Sterling bought $1.3026 late in the previous session.

Against the yen , the dollar bought Yen111.45, compared with Yen112.13 prior to the Fed policy update and in contrast to the Yen111.89 read late Tuesday.

The dollar even pared its gains against Switzerland's currency , against which it had previously been up roughly 0.6%.

Ahead of the Fed statement, the greenback bought 95.30 Swiss francs, down from the 95.82 Swiss francs it had traded at prior to the statement, though still up slightly from 95.25 Swiss francs late Tuesday. The Swiss currency tends to act as a haven asset, but the Swiss National Bank lately hasn't struck the hawkish tones about policy heard from other central banks including the European Central Bank. The franc is up about 6.4% against the dollar this year.

(END) Dow Jones Newswires

July 26, 2017 14:55 ET (18:55 GMT)