The U.S. dollar fell to its lowest level since mid-December against a basket of its major rivals overnight as the Fed’s ultra-easy policy stance encouraged investors to seek returns in higher risk assets. Yesterday, the Federal Reserve kept lending rates and its asset purchase program unchanged, as widely expected. However, the Fed forecast that its ultra-accommodative policy stance would remain in place through the end of 2014, 18-months longer than its previous forecasts. The prospect of rock bottom U.S. borrowing costs for such an extended period leaves the dollar vulnerable to selling in favor of stocks, commodities and higher yielding currencies. The Fed’s statement notably did not acknowledge the recent uptick in U.S. economic reports, which suggests that policymakers’ outlook on the U.S. recovery remains cautious and that a sustained period of disinflation could herald in another round of asset purchases. While the dollar’s medium-term outlook still remains positive, the Fed’s very dovish statement yesterday should result in additional near-term headwinds for the greenback.

The euro rose to a new five-week high against the greenback following yesterday’s Fed policy statement, which was surprisingly more dovish than expected. Optimism that EU officials and Greek bondholders are close to reaching compromise that will help avoid a disorderly debt default added to the euro’s resurgent tone. While additional near-term upside is likely, the euro remains vulnerable. Despite yesterday’s very dovish Fed statement, the outlook for euro zone monetary policy still remains far more dovish that the U.S.’s.

The yen, which fell to a two-month low yesterday, recovered nearly all of its recent losses. The Fed’s dovish policy statement yesterday pushed U.S. Treasury yields sharply lower, which makes U.S. assets slightly less appealing to Japanese institutional investors.

EUR: The euro rose to a new five-week high against the broadly weaker greenback overnight. The single currency’s resurgent tone was initially fueled by a number of positive euro zone bond auctions last week and hopes that the IMF will boost its lending capacity by up to $500 billion. Yesterday’s very dovish FOMC policy statement pushed the U.S. dollar sharply lower and helped improve the outlook for risk appetite across global financial markets. The prospect of ultra-easy Fed policy means that cheap dollars will continue to flood the global financial system. Investors become incentivized to borrow dollars cheaply, and then invest in higher returning and riskier assets abroad. As such, the dollar becomes the funding currency of choice for carry trades. While the euro may enjoy some additional near-term upside as a result, its overall medium-term outlook remains decidedly troubled. The long list of issues that have plagued the euro zone for the better part of the last year remains largely unaddressed. Moreover, despite the Fed’s very dovish statement yesterday, the outlook for ECB monetary policy remains far more dovish as the central bank must fend off a looming recession and act as a backstop for the regions troubled sovereign credit markets.   

AUD: The Aussie rose to a three-month peak against the struggling dollar overnight, boosted by the Fed’s surprisingly accommodative policy statement yesterday. The Aussie, along with its commodity counterparts from New Zealand and Canada, tends to benefit during periods improving economic and financial market optimism. The prospect of a period of ultra-accommodative U.S. monetary policy until late 2014 implies that cheap money will continue to flow to higher yielding regions. With the highest interest rates in the industrialized world, Australia and New Zealand stand to benefit from continued capital inflows. While this group’s momentum remains strong, it remains vulnerable to renewed euro-related stress, domestic policy easing, or worries about a hard landing for China’s economy.

GBP: The pound capitalized on the broad selloff in the dollar, despite yesterday’s dovish BOE minutes and worse than expected U.K. GDP. It should remain buoyant as long as pressure on the dollar persists. However, sterling could run into a wall of resistance as the prospect of additional BOE policy easing materializes, likely as early as early February.  

USD: U.S. weekly jobless claims rose by 377,000 last week, an increase of 21,000 and slightly above the consensus forecast. Durable goods orders jumped by 3.0%(m/m) in December, better than the 2.0%(m/m) increase expected. Solid increases in the subcomponents of the report along with positive revisions to November’s data made for an overall strong print for durable goods. The data however, continues to take a backseat to yesterday’s dovish FOMC statement.