Dollar weakens after Fed leaves rates unchanged

By Sam Forgione and Dion Rabouin

NEW YORK (Reuters) - The U.S. dollar extended losses against a basket of major currencies on Wednesday after the U.S. Federal Reserve left monetary policy unchanged and projected a less aggressive rise of interest rates in coming years.

The Fed strongly signaled it could still lift rates by the end of this year if the labor market improved further. The central bank noted U.S. economic activity had picked up and job gains were "solid" in recent months.

Fed policymakers, however, cut the number of rate increases they expect this year to one from two, and also projected a less aggressive rise in rates next year and in 2018, according to the median projection of forecasts released with the statement.

"The dot plot has moved quite sharply lower," said Alvise Marino, FX strategist at Credit Suisse in New York, in reference to the Fed's less aggressive rate rise projections. "That in itself is a pretty dovish development."

Losses were limited by the Fed statement suggesting it was still open to a December rate increase, noted Ian Gordon, FX strategist at Bank of America Merrill Lynch in New York.

The dollar index <.DXY>, which measures the greenback against a basket of six major currencies, extended its decline to a five-day low of 95.515, off more than 0.50 percent and down from a more than six-week high of 96.333 touched earlier.

The dollar fell to a 3-1/2 week low of 100.37 yen, off 1.3 percent on the day, after the Fed decision at 2 p.m. EDT (1800 GMT).

Traders' expectations for a December hike rose slightly after the statement, to 59.3 percent from 59.2 percent on Tuesday, according to CME Group's FedWatch program.

The dollar had already fallen more than 1 percent against the yen before the statement in response to the Bank of Japan's policy shift earlier on Wednesday.

The BOJ shifted to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation.

Investors took a skeptical stance on the BOJ's ability to generate inflation through the new measures, which drove the yen higher against the dollar.

The euro rose modestly against the dollar to a session high of $1.1196 after the Fed statement, recovering from earlier losses.

(Reporting by Sam Forgione and Dion Rabouin; Editing by Daniel Bases)

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