The dollar fell for a third session amid growing expectations the Federal Reserve will try to stimulate the economy via additional bond purchases when it concludes a two-day meeting.
The Federal Open Market Committee's meeting is expected to end at 12:30 p.m. Eastern. Later in the afternoon, the U.S. central bank will release its updated economic projects and Fed Chairman Ben Bernanke will hold a news conference.
"The consensus view is certainly that the Fed takes action, although gauging what exactly is priced in is rather difficult," said Jeremy Stretch, a currency strategist at CIBC in London. Analysts haven't agreed what the details of such a plan may look like; the Fed could announce a set amount or open-ended purchases, or extending the period over which it says in its statement that interest rates will be kept low.
"But the rally in risk assets does underline that markets have priced in expectations of action," he wrote in a note to clients.
Mr. Stretch, however, expects the U.S. central bank to signal that it will take action after the conclusion of its current "Operation Twist" activities in December—a move that could trigger a selloff in risk-oriented assets and boost the dollar.
"No immediate Fed action should send [the dollar index] back toward 80.50 and back toward the 200-day moving average at 80.77," he said.
The ICE dollar index, which measures the U.S. unit against a basket of six currencies, recently fell to 79.64 from 79.728 in late North American trading on Wednesday.
In late-morning trade, the euro was at $1.2909 compared with $1.2899 late Wednesday. The dollar was at ¥77.41 compared with ¥77.85, while the euro traded at ¥99.929 compared with ¥100.44. The pound bought $1.6119 compared with $1.6107, while the dollar fetched 0.9401 Swiss franc from 0.9372 franc.
Prospects for additional stimulus, particularly quantitative easing, are seen as potentially negative for the currency. Quantitative easing, or QE, relies on electronically expanding reserves, which are used to purchase assets.
Strategists said the dollar/yen currency pair will give the most obvious reaction to monetary-policy moves, because it tends to be closely correlated to U.S. bond yields.
"While the [Bank of Japan] has been more aggressively involved in QE, its success in manipulating the yen lower has been hindered by Japan's current account surplus and the instinct of investors to bring money home in times of uncertainty," said Jane Foley, senior currency strategist at Rabobank International in London.
"If the Fed steps up monetary-policy action this afternoon and perhaps even more in the coming months in an effort to stimulate the U.S. labor market and shield the U.S. economy from any negative fallout surrounding the 'fiscal cliff,' the yen is set to be faced with carrying a greater proportion of the world's safe-haven currency flows," she wrote.
Besides expectations for the Fed, the euro has benefited from more signs of political will among Europe's leaders to keep the euro zone together.
Dutch elections on Wednesday saw the country's pro-European centrist parties emerge on top, setting the stage for a likely coalition.
The dollar fell to its lowest level against the euro in nearly five months on Wednesday, pressured after Germany's Federal Constitutional Court cleared the way for Berlin to fund its share of any future bailouts needed by other euro-zone countries.
Meanwhile, the Swiss National Bank left its minimum exchange rate for the currency pair at CHF1.20 and vowed to continue to defend the floor, including making unlimited currency purchases if needed. The euro changed hands at 1.2124 Swiss francs, a gain of 0.3%.
