* Dollar's recent gains unravel as U.S. yields retreat
* Fed confident in economic recovery but lowers some
* New Zealand dollar hits trade-weighted record high
By Patrick Graham
LONDON, June 19 The dollar sank to its weakest
level in three weeks on Thursday after a cautious message from
the Federal Reserve stopped well short of the aggressive signal
of prospective higher interest rates expected by some in the
In Europe, meetings of the Swiss and Norwegian central banks
were the early focus . The euro traded at its
highest level in 10 days against the dollar while sterling
inched up to a new 5-year high of $1.7018 and the New Zealand
dollar soared to a record high.
New projections suggested the Fed saw rates rising more in
2015 and 2016 than it had previously forecast, but officials
lowered their long-term rate target. The Fed also sounded
comfortable with the inflation outlook despite recent signs of a
pick-up in price pressure.
Fed chief Janet Yellen said there had been "a slight decline
of projections pertaining to longer-term growth" and officials
lowered their view of the expected long-term federal funds rate
from 4 percent to 3.75 percent.
"There were those speculating that the Fed would have to
come up with a more hawkish commentary and obviously they have
been disappointed," said Neil Mellor, a strategist with Bank of
New York Mellon in London.
"Nothing has really changed from the past few days, so there
will be a propensity to buy some euros, and probably sterling in
lockstep with that."
U.S. Treasury yields fell, with the benchmark 10-year rate
dropping to 2.582 percent from the U.S. close of
"U.S. dollar weakness is likely to be sustained unless we
get a sea change in the communique coming from the Fed, so
upside risks look likely for euro, kiwi and Aussie," said Sue
Trinh, currency strategist at RBC Capital Markets.
The dollar index traded at its lowest since May 27,
down almost 0.5 percent on the day at 80.23.
A further rise in oil prices underlined that investors
remain deeply concerned by events in Iraq. The resulting
search for safe havens for their money was underpinning
traditionally safe bets like the yen, dollar and Swiss franc.
The franc inched up to a session high of 1.2173 francs per
euro after the Swiss National Bank kept all of its policy
The yen was just over 0.1 percent higher against the dollar
in early European trade, trading at 101.78 yen versus a
one-week high of 102.38 yen before the Fed's announcement. The
euro was slightly lower at $1.3589 after it touched $1.3600
Another cloud looming on the horizon and sapping investors'
risk appetite was Argentina's threat of default on its debt. On
Wednesday, that country's government called it "impossible" to
pay bond service due on June 30, citing a U.S. court decision
earlier in the day.
Commodity currencies fared particularly well against the
dollar after the Fed announcement, with the New Zealand currency
rallying nearly 1 percent to six-week highs of $0.8736.
It was last down 0.1 percent from those highs at $0.8713. On a
trade-weighted basis, the kiwi rose to a record high of
The outlook for higher New Zealand interest rates was
reinforced by data showing the economy grew a solid 1.0 percent
in the first quarter from the previous quarter, a result that
cemented New Zealand as one of the fastest-growing developed
The Australian dollar was steady on the day at $0.9418
, having gained 0.7 percent on Wednesday.
(Additional reporting by Lisa Twaronite in Tokyo and Ian Chua
in Sydney; Editing by Pravin Char)