Forex

The U.S. dollar steadied after falling sharply following last night's statement from the Federal Reserve, which dampened expectations for an imminent rate hike.

As expected, the Federal Open Market Committee left its key Fed Funds rate at 2.00 percent. But while the accompanying statement placed more emphasis on inflation than the one released with April's decision, it gave little hint that rates will rise any time soon.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the statement said.

Geoffrey Yu, currency analyst at UBS, said markets were rather disappointed the Fed had not given a clearer steer on when rates are likely to change again.

"The Fed did sharpen its tone on inflation, warning of upside risks to inflation and inflation expectations, but in desisting from going further and signalling a rate hike in the coming months, the Fed has tacitly acknowledged that ongoing economic weakness warrants a more cautious stance," he said.

The dollar has fallen particularly sharply against the euro, as while there remains uncertainty over the timing of any rate rise in the United States, markets are fully pricing in a hike from the European Central Bank next week.

"Against an ECB that looks set to pull the trigger next week, the euro can inch even higher against the dollar," said Gavin Friend, currency strategist at Commerzbank.

Later on Thursday, focus will be on U.S. existing home sales numbers on whether the beleaguered housing market is finally starting to recover. Analysts expect the annual rate of sales to have risen to 5.0 million in May from 4.89 million in April.

Also of note will be the final reading of first-quarter U.S. GDP growth, which is expected to be revised up to 1.0 percent from the initial estimate of 0.9 percent.

"U.S. data releases may come as a little bit of relief to U.S. markets today following the run of soft data over recent days," said Mitul Kotecha, head of currency research at Calyon.

The pound was stronger ahead of a much-anticipated appearance by Bank of England rate setters before the Treasury Select Committee. BoE governor Mervyn King, outgoing deputy governor John Gieve and markets director Paul Tucker will all appear before the cross-party panel of MPs, along with external Monetary Policy Committee members Tim Besley and Kate Barker.

The committee is due to question them on the May Inflation Report, which shifted market expectations for a cut in UK interest rates later this year to a hike as the Bank tries to bring CPI inflation back to its 2.0 percent target.

Since the report figures showed inflation during May rose to 3.3 percent, triggering a letter of explanation from King to Chancellor of the Exchequer Alistair Darling about how he plans to bring it back to target.

But at the same time data has continued to show the UK housing market is deteriorating amid tightening credit conditions, raising speculation the economy could be facing a period of stagflation -- when pricing pressures rise while growth falls.

"Ultimately, (the hearing) is likely to be tough going for MPC members who face a growing policy dilemma," said Kotecha at Calyon.

Ahead of the hearing, figures are expected to show UK business investment fell during the first quarter of the year for the first time in more than two years.

Analysts reckon the quarterly fall will be 1.5 percent, above the 1.4 percent provisional estimate. That would confirm the first quarterly decline since the fourth quarter of 2005.