Forex - Dollar drops as Fed leaves stimulus program unchanged

The dollar plummeted against most major currencies on Wednesday after the Federal Reserve said it was making no changes to its USD85 billion monthly bond-buying program.

Many investors were expecting the U.S. central bank to trim the amount of bonds it purchases a month at least by USD10 billion.

In U.S. trading on Wednesday, EUR/USD was up 1.07% at 1.3501.

The Federal Reserve on Wednesday left its key benchmark lending target, the fed funds rate, unchanged at 0.25% and kept its USD85 billion monthly asset-purchasing program in place. 

The Fed said the economy was showing signs of improvement though it still faced enough headwinds to prompt monetary authorities to hold off on tapering its asset purchases, which weaken the dollar to spur recovery. 

The Fed said in a statement that household spending and business fixed investment have improved, while the housing sector has been strengthening as well.

However, mortgage rates have risen, while U.S. fiscal issues are restraining economic growth.

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy," the Fed said. 

"However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the Fed said, adding it would continue to buy USD40 billion a month in mortgage-backed securities and USD45 billion in longer-term Treasury securities.

"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate."

Fed Chairman Ben Bernanke told a press conference afterwards that he felt past and present rounds of asset purchases have been effective, though he added government inability to tackle debt and deficits, including calls in Congress to shut down the government due to fiscal and policy disputes, concerned monetary authorities.

Market participants largely ignored Commerce Department data revealed that U.S. building permits fell by 3.8% to 918,000 units in August from 954,000 in July. Analysts were expecting building permits to fall by 0.4% to 950,000 units last month. 

The Commerce Department added that U.S. housing starts rose 0.9% to 891,000 units last month from a downwardly revised 883,000 units in July, missing expectations for a 3% increase to 917,000 units. 

Elsewhere, the greenback was down against the pound, with GBP/USDup 1.25% at 1.6102.

The dollar was down against the yen, with USD/JPY down 0.99% at 98.14, and down against the Swiss franc, with USD/CHF trading down 1.26% at 0.9144.

The dollar was down against its cousins in Canada, Australia and New Zealand, with USD/CAD down 0.78% at 1.0216, AUD/USD up 1.36% at 0.9482 and NZD/USD trading up 1.37% at 0.8351.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 1.12% at 80.39.