Dollar bounces back from 7-month lows after strong Fed statement

The dollar was steady on Wednesday, reversing major early losses, after the Federal Reserve raised U.S. overnight interest rates and said it was prepared to continue tightening monetary policy.

The dollar index, which tracks the greenback against six major currencies, fell to its lowest level since Nov. 9 in early trading after the release of weaker-than-expected U.S. inflation and retail sales figures.

U.S. retail sales in May recorded their biggest drop in 16 months and the Consumer Price Index unexpectedly fell month-over-month, suggesting inflation pressures could be moderating.

However, the Federal Reserve, in the statement released at the close of a two-day policy meeting, indicated it viewed the recent weakness in economic data as temporary, and it detailed expectations to continue raising rates. The Fed also laid out plans to pare back its $4 trillion balance sheet this year.

"The Fed’s message is that they’re not overreacting to" the CPI and retail sales data, said Richard Franulovich, senior currency strategist at Westpac Banking Corp.

"It’s very much a full-steam-ahead message, and the dot plot says they expect to hike once more this year. That’s on the hawkish side of expectations and as a result the dollar has clawed back a lot of its earlier losses."

The policy makers' release of quarterly economic forecasts is often referred to as the "dot plot" because of the chart indicating the Fed's rate setters' expectations.

Fed Chair Janet Yellen's news conference highlighted the central bank's rosy outlook on the economy, boosting the dollar broadly.

The euro, after earlier rising to its highest level against the dollar since Nov. 9, was last little changed at $1.1215.

Against the yen, the dollar was last down 0.35 percent, to 109.70 yen, after falling as much as 1 percent and hitting its lowest level against the Japanese currency since April.

Commodity-linked currencies such as the Australian Dollar, New Zealand Dollar and Canadian dollars, also pared gains against the U.S. currency after touching multi-month highs following the release of U.S. data.

"Now that the Fed is apparently not as dovish as we thought and won’t be reacting to weak inflation numbers, the Aussie and kiwi are naturally giving up their gains," Franulovich said.