Dollar advances against the euro after Fed decision

NEW YORK (Reuters) - The dollar climbed against the euro on Wednesday after the U.S. Federal Reserve held interest rates steady and said its main worry is that inflation will fail to moderate.

The widely expected decision by the U.S. central bank's Federal Open Market Committee keeps the overnight federal funds rate target at the level it has held since June 2006 of 5.25 percent following 17 straight quarter-percentage point increases.

"The dollar is gaining across the board because the Fed made no recognition of the March slowdown in core inflation, the slowdown in payrolls, industrial production, and consumer spending," said Ashraf Laidi, chief FX analyst at CMC Markets in New York. "The fact that the Fed shrugged off these important factors is a signal to the market that the Fed will hold rates steady for the rest of the year."

The euro EUR= was down 0.1 percent at $1.3530 after the decision while dollar/yen JPY= was little changed at 120.00 yen.

In a statement outlining its decision that hewed closely to its last announcement in late March, the Fed nodded to recent sluggish economic growth, but held to its view that the economy was likely to expand at a moderate pace in coming quarters.

It also said: "Core inflation remains somewhat elevated."

"Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures," the Fed said, in a reference to tight labor markets.

RATE FUTURES FALL

U.S. short-term interest rate futures fell after the Fed ended its policy meeting.

Futures show the market expects the Fed to hold rates steady at 5.25 percent again in June FFN7 while prospects for a cut in August FFQ7 dropped to 15 percent from 18 percent.

Futures now price in just a single Fed rate cut in 2007, against an 18 percent chance earlier that the Fed would cut rates twice.

But analysts said the dollar's gains after the Fed decision may be short lived.

"I don't think any of this changes the outlook for a rate cut from the Fed later in the year," said Alex Beuzelin, senior market analyst at Ruesch International in Washington. "Today's move is really about short-term positioning."

Investor focus now shifts to rate decisions on Thursday from the Bank of England, which is seen raising rates to 5.5 percent, and the European Central Bank, which is likely to hold rates at 3.75 percent but signal a hike in June.

The euro zone and UK economies are still showing signs of growth at a time when the U.S. economy is slowing, increasing the relative appeal of the euro and sterling over the dollar.

Sterling was up nearly 0.3 percent at $1.9942 GBP=.