The dollar hit a three-week low against a basket of major currencies on Friday, after the Federal Reserve failed to meet some investors' expectations of a first U.S. interest rate rise in almost a decade.
Though a majority had bet the Fed would keep rates unchanged, a significant minority had reckoned on a rate rise. Furthermore, though the central bank left open the possibility of modest policy tightening later this year, Fed Chair Janet Yellen said the global growth outlook had become less certain.
The announcement triggered broad losses for the dollar, which hit more than three-week lows against the euro and sterling, and a four-week trough against its Canadian counterpart. On Friday the dollar index hit 94.282, its weakest since late August.
The prospect of loose monetary conditions for longer reignited investors' appetite for risk, and high-yielding riskier currencies such as the Australian and Kiwi dollars gained sharply .
Simon Derrick, head of currency research at Bank of New York Mellon in London, said renewed risk appetite would keep any euro gains limited. The euro has benefited from risk aversion in recent months, as investors who had held euro-funded positions on riskier currencies bought back the single currency.
In what amounted to a tactical retreat, Yellen said in her statement that developments in a tightly linked global economy had in effect forced the U.S. central bank's hand, and warned that recent developments abroad and in financial markets could put further downward pressure on inflation in the near term.
"The...interesting bit about it was the fact that she was quite so explicit in terms of laying out exactly why they weren't doing anything," Derrick said. "Yes, they talked about inflation quite clearly, but front and center were concerns about what was happening in China, and more generally for emerging markets."
The dollar fell half a percent against the yen after a more moderate decline in the wake of the Fed announcement, buying 119.455 yen.
Thirteen of 17 Fed policymakers expected to raise interest rates in 2015, down from 15 at the bank's June meeting. Four policymakers, up from two, now believe the bank should wait until at least 2016.
"With the overwhelming majority in the FOMC still expecting to hike this year, and the domestic economy maintaining its momentum, we stick to our call of a December rate hike," strategists at Rabobank said.
"Although Yellen said that October remains a possibility, we doubt that the economic data between now and then will be sufficient to hike," they said in a note to clients.
Rates futures placed an 18 percent chance that the U.S. central bank would end its near-zero interest rate policy in October, down from 41 percent Thursday morning, according to CME Group's FedWatch program.
(Additional reporting by Lisa Twaronite in Tokyo; Editing by Dominic Evans)