The dollar fell against the euro and a basket of currencies on Tuesday on expectations the Federal Reserve would repeat a pledge to keep interest rates very low for a long time, encouraging investors to buy riskier assets at the expense of the greenback.
The policy-setting Federal Open Market Committee, which will announce its decision at about 2:15 pm (1815 GMT), is widely expected to hold benchmark U.S. rates near zero and repeat that conditions warrant keeping them "exceptionally low" for an "extended period."
Investors will focus on the Fed's assessment of the economic outlook and on whether there are more dissenters wanting to drop the "extended period" reference after recent economic data showed U.S. consumers are buying more and firms seem ready to hire again.
"The anticipation for the Fed is that they're going to give a slightly more upbeat outlook for the U.S. economy, but at the same time they're going to keep the language intact and not signal any rate increase any time soon," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "That combination is going to be risk positive."
Near zero U.S. rates have pressured the dollar over the past months as investors borrowed in the greenback and used the proceeds to buy higher-yielding, riskier currencies such as the Australian dollar.
In early trading, the dollar index .DXY, a gauge of its performance against six major currencies, was down 0.4 percent at 79.969, with near term resistance seen around 80.85, its March 10 high.
Another focus was whether the Fed would begin laying the groundwork for a shift in the "extended period" language. The vast majority of primary dealers see a change as early as April.
Still, most do not see an interest rate increase until the second half of this year
"The market looks about right in pricing November as the start of the Fed tightening cycle, but the prospect that excess liquidity is withdrawn earlier suggests the risk to U.S. yields and the dollar remains to the upside," said Chris Turner, head of FX strategy at ING.
EURO UPSIDE HEAVY
The euro rose 0.4 percent to $1.3726 EUR=. It touched session highs against the dollar and yen after data showed German ZEW institute's economic sentiment index came in higher than expected.
Concerns about an immediate meltdown over Greece's massive debt have eased as euro zone finance ministers on Monday agreed on a plan to help Greece if needed. [ID:nLDE62D08S]
But with little known about the plan's details, underlying sentiment toward the euro remained cautious.
Against the yen, the dollar JPY= was little changed at 90.48 yen, while the euro gained 0.4 percent to 124.25 yen EURJPY=R.
The yen has come under pressure on speculation the Bank of Japan is leaning towards monetary easing steps this week, but that was partly offset as Japanese firms repatriated funds ahead of the financial year-end on March 31.
Tensions over China's currency practices brewed after a letter by 130 U.S. lawmakers on Monday called on the Obama administration to get tough with Beijing, a day after Chinese Premier Wen Jiabao brushed off accusations of currency manipulation
