By Deborah Levine and Barbara Kollmeyer, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar turned up sharply on Wednesday after the Federal Reserve said it would extend its currency bond-purchase operation.
Some analysts expected the central bank to either expand the program more than it did, or resume outright bond purchases, which would have been more negative for the currency.
The euro EURUSD +0.0391% turned down to $1.2681, after being little changed from $1.2698 on Tuesday.
The dollar index DXY +0.20% , which measures the dollar against a basket of six currencies, rose to at 81.524 from 81.365 in late North American trading Tuesday.
Against the Japanese yen USDJPY +0.6630% , the dollar pared gains to ÂĄ79.46, compared to ÂĄ79.06 late the previous day.
The British pound GBPUSD -0.1092% turned down to $1.5711 from $1.5740 Tuesday.
The Fed Open Market Committee also left its target interest rate range intact, at zero to a quarter-percentage point. Read story on FOMC decision.
Still to come, Fed officials will release revised forecasts at 2 p.m. Eastern time, then Fed Chairman Ben Bernanke will hold a press conference beginning at 2:15 p.m.
The most common outlook was that the central bank would extend its Operation Twist Treasury-buying program, which is due to expire at the end of this month. See more on Fed options, Treasury bonds.
A more dollar-negative outcome would have been if the Fed expanded its balance sheet by purchasing more bonds, which is seen as akin to printing money.
The Fed could also have opted to just change language in its policy statement about its willingness to act later if conditions deteriorate.
Beyond Wednesday’s potential for volatility, the impact may be more muted because everyone knows the Fed’s options are dwindling and “in a relative sense, other major central banks are largely going along the same road, albeit with slightly different route maps,” said Simon Smith, head of research at FxPro,
Meanwhile in Europe
News out of Europe was tame. Greek leaders struck a deal to form a coalition government. See story on Greek coalition.
On Tuesday, the single European currency popped above $1.27, its best level in almost a month, as bond yields in Spain and other so-called peripheral countries eased on reports that Germany would approve a plan to have the euro-zone bailout fund buy the sovereign debt of troubled member nations. German officials denied the report.
The Group of 20 meeting concluded Tuesday with Europe asked to “break the feedback loop” between weak banks and weak sovereigns. Germany was in the spotlight with reports of pressure from other members on German Chancellor Angela Merkel to hold the union together.
“The G20 summit was another small step in the right direction but that a lot of details are still missing to feel confident that the rebound in the euro-dollar could be extended beyond its recent highs,” said strategists at Citi. “We remain concerned that the Eurogroup meeting tomorrow and the European Union summit next week will not provide the bold and decisive response to the crisis that investors are hoping for.”
Deborah Levine is a MarketWatch reporter, based in New York.
Barbara Kollmeyer is an editor for MarketWatch in Madrid.
