Dollar tumbles as Fed to keep rates low for some time

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar fell against most currencies in choppy trading on Wednesday after the Federal Reserve left interest rates steady, as expected, and said it intends to keep interest rates low for an "extended period."

Low interest rates should ensure that the dollar remains a funding currency in risky carry trades -- transactions in which investors borrow in dollars to buy higher-yielding assets.

"Risk on, on, on," said David Watt, senior currency strategist, at RBC Capital Markets in Toronto.

"Though there are still some indications that the risk backdrop remains dicier than it has in months, such concerns have been steamrolled by a rally in risk and a renewed spell of aversion to the dollar linked to the fact that the Fed will continue to leave the pedal to the metal 'for an extended period.'"

But investors, on the whole, remained cautious about selling the dollar too aggressively. The Fed said in its statement that while economic activity has picked up, consumer spending remained constrained by job losses and tight credit.

Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington, noted the uncertainty as well. "The catch to this is that the Fed is signaling the U.S. economy is in very, very bad shape. By not removing 'extended period' from the statement, what it is signaling is that (there are) economic troubles ahead."

The Fed also said it has decided to reduce the size of its agency debt purchases to $175 billion from the previously announced $200 billion.

Analysts said this should not be interpreted as part of an exit strategy, as the central bank said the decision was made because there was "limited availability" of agency debt in the secondary market.