Dollar Sinks as Fed Keeps Rates on Hold

The Federal Reserve's projection for near-zero interest rates through late 2014 sent the dollar to a 2012 low against the euro.

The dollar plummeted immediately against nearly all currencies after the Fed surprised market participants by extending the period it expects to keep its key interest rate near zero by a year, to late 2014. The outlook came in a statement put out at the conclusion of the central bank's policy meeting.

In late-afternoon trade, the euro was at $1.3112 from $1.3037 late Tuesday. The common currency advanced following a news conference by Fed Chairman Ben Bernanke, where he affirmed the long period of extremely low rates outlined in the central bank's statement.

"The fed was crystal clear" in its intentions to keep rates low until at least 2014, said Krishna Memani, portfolio manager and director of fixed income at Oppenheimer. "The bottom line is that this statement was far more dovish than anybody was expecting."

The dollar also tumbled against the yen after hitting a one-month high of ¥78.29 earlier in the session. It traded at ¥77.73 in recent trade from ¥77.67 late Tuesday. The dollar fetched 0.9208 Swiss franc from 0.9276 Swiss franc. The U.K. pound bought $1.5662 from $1.5626.

The Fed's statement quickly doused long-term optimism over the dollar, leading many traders to unwind speculative bets that the greenback would rise.

"It looks like people are stampeding out of U.S. dollar long positions," said David Rodriguez, a currency strategist at DailyFX.com, the research arm of FXCM. Dollar long positions are bets the dollar will rise against other currencies.

As of Jan. 17, for example, bets on the Chicago Mercantile Exchange that the dollar would rise against the euro were at their highest level in at least four years, according to the most recent available data from the Commodity Futures Trading Commission.

That's because the dollar once again becomes a cheap currency that can be used to fund trades against other higher-yielding currencies or assets, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

In its first-ever forecast breaking down when central bankers expect rates to rise, the Fed said nine of 17 members expect the bank's benchmark rate to be at or below 0.25% by the end of 2013 and 11 see rates at or below 1% by the end of 2014. It is currently set at a target rate between 0% and 0.25%.

Higher-yielding and more growth-sensitive currencies like the Australia, New Zealand and Canadian dollars will become more attractive options than the U.S. dollar because rates in those countries are higher, Mr. Esiner said.

The U.S. dollar fell to C$1.0039 from C$1.0090 late Tuesday, and the Australian dollar rose to $1.0604 from $1.0493,.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.43 from 79.868.

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