"The Fed tends to take preventative steps on the economy, considering the way the Fed started QE3. Given concerns about the fiscal cliff, I think the Fed will do what's been discussed in markets," said Hideki Amikura, forex manager at Nomura Trust Bank. "In that case, the euro/dollar should rise further," he added. The dollar index stood at 80.10, barely changed from late US levels but down 0.5 percent so far this week. For now, it is holding above a 61.8 percent retracement of its rally last week at 80.00 but a fall below that level could open the way for a test of six-week low of 79.568 hit a week ago.
The Fed, which ends a two-day policy meeting later on Wednesday, is expected to replace its expiring 'Operation Twist' programme with a fresh round of outright bond purchases. Many economists believe the US central bank will announce monthly debt purchases of $45 billion, which will come on top of mortgage bond buying of $40 billion a month the bank started in September.
"Although the view that the Fed will shift to outright Treasury purchases is now very widely shared by market participants, we do not believe it has been fully reflected into markets or in positioning," said Vassili Serebriakov, a strategist at BNP Paribas. The euro pulled away further from a two-week low around $1.2876 plumbed Friday and last stood at $1.3001, keeping gains after Tuesday's surprisingly strong Germany's ZEW economic sentiment index.
Morale among German analysts and investors improved sharply in December, fanning hopes that Europe's largest economy may avoid recession this winter despite all the grim news out of other parts of the region. The Australian dollar hit a three-month high of $1.0541 and last stood at $1.0533, near late US levels.
The Canadian dollar was near a seven-week high of C$0.9858 per US dollar hit on Tuesday while the New Zealand dollar stood near a nine-month peak of $0.8398. The Australian dollar hit an 8-1/2-month high of 87.01 yen as the yen has been hurt by speculation that the Bank of Japan will take more aggressive easing steps after a likely victory of the Liberal Democratic Party in the country's election on Sunday. Against the US dollar, the yen weakened about 0.2 percent to 82.65 yen, not far from 7 1/2-month low of 82.84 per dollar hit almost three weeks ago.