NEW YORK The U.S. dollar suffered stinging losses on Wednesday, undermined by the U.S. Federal Reserve saying it is willing to deliver more monetary stimulus "fairly soon" unless the economy improves considerably.
Against the greenback, the euro popped to a fresh seven week high, the yen advanced to a one-week peak and the Australian dollar turned a loss into a gain after the Fed released the minutes of its latest meeting.
The minutes from the July 31-August 1 meeting, which came just before a string of upbeat economic data, showed that central bankers were categorical in their dissatisfaction with the current economic outlook.
Extra stimulus, most likely in the form of a third round of bond buying otherwise known as quantitative easing, amounts to the printing of more U.S. dollars, thereby diluting its value.
The euro hit $1.2538, its best level against the greenback since July 5 before dipping back to $1.2525, still up 0.44 percent on the day, according to Reuters data.
The U.S. dollar fell 1.05 percent to 78.50 yen, its weakest in over a week. The dollar has been shunted lower from Monday's five week high.
"The minutes come across as quite dovish but a lot has improved in the market and data, somewhat better domestic data. Much better risk... I would credit the ECB with putting a floor to the crisis," said Dana Saporta, economist with Credit Suisse in New York.
"It's interesting to note that they point out that the market has the capacity to handle more large scale asset purchases."
Expectations have built in recent weeks that the European Central Bank will announce plans at its next policy meeting on September 6 to help lower Spanish and Italian bond yields, which some analysts believe will enable the euro to gain further.
"The main issue is whether the ECB will start buying peripheral bonds ... We have been seeing a bit of short-covering in the euro over the last couple of weeks on fears of a big bazooka," said Arne Lohmann Rasmussen, head of currency research at Danske Bank.
"People are pricing out the risk that the euro zone will implode."
Danske forecasts the euro will rise to $1.27 in three months as a proactive policy from the ECB eases euro zone debt worries and leads investors to trim hefty bets on the currency falling.
Earlier, U.S. existing home sales data rose, but not enough to meet analyst expectations, causing some selling of the greenback against the euro before the Fed's meeting minutes.
Greek Prime Minister Antonis Samaras will meet Eurogroup chief Jean-Claude Juncker on Wednesday and German Chancellor Angela Merkel and French President Francois Hollande later this week. He is expected to broach the idea of giving Greece more time to implement budget cuts.
"Any comments that are constructive, giving Greece at least a chance to get an additional bailout package, is something that could support the euro further," said Ulrich Leuchtmann, head of FX research at Commerzbank in London.
However, he said the euro might struggle to rise much beyond the mid-$1.20s, given numerous risks looming in September.
But German Chancellor Angela Merkel said on Wednesday there will be no decisions at Friday's meeting between herself and Samaras.
After the ECB meeting, Dutch elections and a German Constitutional Court ruling on the euro zone bailout fund are scheduled for September 12 and European Union finance ministers meet on September 14-15.
A British newspaper report on Tuesday supported a weekend report in Germany's Der Spiegel that the ECB plans to help Spain and Italy reduce their high public debt.
Analysts warned that growing speculation about ECB action has lifted demand for the euro, but also increased scope for disappointment if the ECB fails to match these expectations.
The euro fell 0.62 percent against the yen to 98.28 yen, having hit a seven-week high on Tuesday.
Japan's exports slumped the most in six months in July as shipments to Europe and China tumbled, adding to concerns about global demand after a string of dire trade figures from Asia's export engines.
The Australian dollar reversed course after the Fed's news, surging to a session high of $1.0517 against the U.S. dollar, a gain of 0.20 percent. The Aussie had plumbed $1.0409, just shy of a three-week low, earlier in the session.
Some traders said the fall was partly due to global mining company BHP Billiton saying it would delay a $20 billion copper project as a result of slowing growth in China.
Bad news on China usually weighs on the Australian dollar due to Australia's close trade links with the country.
(Additional reporting by Nick Olivari and Anthony Esposito. Editing by Andre Grenon)