The dollar gained broadly on Wednesday, erasing losses suffered a day earlier as markets digested yesterday's comments from the Federal Reserve and concluded that a rate tightening cycle was still underway.
The dollar fell yesterday after the Fed raised its federal funds rate by 25 basis points to 1.75 per cent but indicated little rush for more aggressive hikes.
The central bank said inflationary pressures had eased, giving some in the market reason to think initially that the central bank may become reluctant to deliver further dollar-boosting rate hikes.
However, as traders gave the statement further scrutiny, they saw a more positive economic outlook that could keep the Fed on track for another rate hike this year.
Higher interest rates tend to support a currency by making returns on deposits more attractive to global investors. Doubts about the pace of the Fed's tightening cycle have been fueled by recent evidence of a soft patch in the US economy.
"It's not surprising to see a rebound today as it's hard to see why the dollar fell so much yesterday," said Mr Steve Barrow, currency strategist at Bear Stearns.
"The Fed's statement was in line with expectations and the dollar's reaction had more to do with short-term positioning."
Sterling was on the defensive after minutes of the Bank of England's latest policy meeting were released today. The minutes reinforced expectations that UK interest rates were near a peak. The minutes showed policymakers voted unanimously to leave UK rates unchanged at 4.75 per cent earlier this month and were concerned about the risk of a sharp house price correction and the effect this could have on consumer spending.
"The need to hike rates further is looking very dubious indeed and this is doing the damage to sterling," said Mr Jason Bonanca, currency strategist at CSFB.