Sterling slid almost 1 per cent, retreating from its highest level since the Brexit vote, after Bank of England Governor Mark Carney said any coming interest rate rises would be limited and gradual. The euro declined against the dollar on Wednesday as the dollar gained strength after the U.S. Federal Reserve signaled it expects one more rate hike by the end of the year.
While the Fed's latest policy stance was viewed as hawkish for the most part, the central bank did lower again its estimated long-term "neutral" interest rate from 3.0 per cent to 2.75 per cent, reflecting concerns about overall economic vitality.
Aside from interest rates, the Fed will address the reduction of its $4.5-trillion balance sheet, which economists expect to begin as soon as October.
Benchmark 10-year German government bond yields were marked 4 basis points higher at 0.48%, the highest since early August, while 2-year U.S. Treasury notes were seen holding almost a 2008 high of 1.44% during European trading.
The euro barely moved at United States dollars 1.1943 and on track to end the week 0.8 percent lower.
But my base case is that the dollar may rally as a result of a more hawkish Fed than expected.
The two-day Fed meeting will end on Wednesday with a statement on monetary policy. "We are likely to find out today if (the dollar) can go any lower or if it has bottomed out".
Platinum rose 0.4 to $967.90 an ounce, while palladium gained just over 1 percent to $933.40.
"The central Spanish government's increasingly rigorous line of action in response to Catalonia's aspirations to independence triggered profit-taking on Spanish debt instruments, which subsequently spilled over to BTPs (Italian debt)", DZ Bank analyst Rene Abrecht said.
Sterling firmed against the dollar, with traders hopeful that a much-anticipated speech from Prime Minister Theresa May on Friday would signal she wants a "soft" exit for Britain from the European Union. It has made session high at 1.2388 and lows at 1.2191 levels.
The ICE Dollar index DXY, -0.07% which measures the greenback against a basket of six rival currencies, fell 0.2% to 91.70, and US stocks indicated a soggy open.
USA government bond yields jumped a hefty 14 basis points last week, but were little changed on Monday, as were most developed bond markets. Oil prices were higher.
USA benchmark West Texas Intermediate (WTI) crude futures hit a four-month high of $50.79 per barrel and last traded at $50.71, flat from the US close on Wednesday.
"Before the Fed announced its decision, there were high expectations that monetary policymakers would drag interest rate expectations lower for 2017", said Hussein Sayed, chief market strategist at FXTM.
The euro added 0.1 percent to $1.2007, moving closer to its September 8 high of $1.2092, its loftiest since January 2015.
The kiwi dollar traded at A91.15c from A91.10c on Monday.
"Abe's policy comments should support the dollar against the yen", Murata said, adding that if the dollar can break above its 200-day moving average around 112.20 yen, 115 would be its next target.