The Fed is expected to announce a fresh round of Treasury bond purchases later on Wednesday, with many economists forecasting it will opt for monthly purchases of $45 billion. However, analysts said there was a risk policymakers may decide to buy more than that, which would put the dollar under broad selling pressure. "People are selling the dollar on the possibility that the Fed could do more easing than the market is expecting," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The possibility of further easing in the United States is putting renewed focus on higher-yielding currencies as the world's four most liquid currencies - the dollar, the euro, the yen and the pound - all have near zero interest rates now. The more dollars the Fed pumps into the market, the more cheaply-borrowed funds investors have to invest in assets which give bigger base returns. The Australian dollar rose to a three-month high versus the US dollar of US $1.0552, although near-term resistance around the September 17 high of $1.0564 could cap gains.
The New Zealand dollar hit a nine-month high of US $0.8418, while the US dollar slipped to an eight-week low of C$0.9853 against its Canadian counterpart. Nordea's Christensen said further dollar falls could see the euro test last week's high of $1.3127. The shared currency rose 0.2 percent to $1.3026, well above a low of $1.2876 reached last week, holding gains made after better-than-forecast German economic sentiment data on Tuesday.
The prospect of more monetary easing in Japan continued to hurt the yen, with the dollar rising 0.55 percent to hit an eight-month high of 82.94 yen, just shy of reported options barriers at 83.00 yen. The euro climbed 0.6 percent to a near eight-month high of 107.98 yen.
Market players said recent polls showing the opposition Liberal Democratic Party (LDP) and its smaller ally are heading for a resounding victory in the Japanese election had contributed to the latest bout of yen weakness. The dollar index fell 0.1 percent to 79.979 as a result of weakness against higher-yielding currencies, edging closer to a six-week low of 79.568 hit last week.