Dollar declines as Fed pledges to keep rates near zero for ‘extended period’

Dollar declines as Fed holds interest rates low

NEW YORK — The dollar declined after the Federal Reserve held its benchmark interest rate at a record low near zero and again pledged to keep it there for an “extended period” to foster the fragile economic recovery.

Higher interest rates can support a currency as investors transfer funds in search of better returns.

In late New York trading Wednesday, the 16-nation euro rose to $1.4888 from $1.4702 late Tuesday, while the British pound advanced to $1.6583 from $1.6402. Meanwhile, the dollar climbed to 90.74 Japanese yen from 90.32 yen.

The Bank of England and European Central Bank make announcements on Thursday. Economists expect the ECB to hold its key interest rate at 1 percent, while the U.K.’s central bank is expected to keep rates at 0.5 percent for an eighth straight month.

Fed Chairman Ben Bernanke and his colleagues warned that while economic activity is stronger, rising joblessness and hard-to-get-credit for many people and companies could restrain the rebound in the months ahead.

The Fed kept the target range for its bank lending rate at zero to 0.25 percent and made no major changes to a program to help drive down mortgage rates.

Traders have lately been borrowing the low-yielding dollar to buy assets that give better returns, a market play called a “carry trade.” That keeps the value of the buck lower, as such trade weighed down the yen earlier this decade.

Meanwhile, a report Wednesday morning from the Institute for Supply Management, a private trade group, signaled continuing, if slow, growth in the service sector last month.

That helped send stock markets higher as traders shunned the safe, low-yielding dollar.

Over the past year, the dollar and stocks have tended to trade inversely, with better-than-expected economic developments or corporate data benefiting equities. Information signaling economic weakness, freeze-ups in credit markets and problems in the financial sector have tended to boost the dollar as investors sought safety in its access to super-safe U.S. Treasurys.

In other late trading Wednesday, the dollar dropped to 1.0144 Swiss francs from 1.0274 francs, and slipped to 1.0617 Canadian dollars from 1.0677 late Tuesday.