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By Bloomberg

The euro steadied after its biggest intraday rally since 2000 when bets for the currency to drop were disappointed when the Federal Reserve unexpectedly reduced its projections for U.S. interest rate increases.

The single currency rose as much as 4.2 percent on Wednesday. Hedge funds and other large speculators had increased their positions betting on the euro’s decline against the dollar to the most bearish since June 2012 in early February. The dollar tumbled the most in six years against major peers on Wednesday as the Federal Open Market Committee almost halved its median estimate for the target rate this year.

“The meeting emphasized the Fed’s data dependence and put the focus on its economic projections, which were dovish and sparked a reversal of positions,” said Masato Yanagiya, head of foreign exchange and money trading at Sumitomo Mitsui Banking Corp. in New York. “That is behind the euro’s surge as the single currency had the biggest positions. The dollar selling may continue given there may be positions that still need to be closed.”

The Bloomberg Dollar Spot Index, a gauge of the currency’s performance against 10 major peers, was little changed at 1,194.92 as of 11:15 a.m. in Tokyo after slumping 1.75 percent on Wednesday, the biggest drop since the Fed announced bond purchases in March 2009. On March 13, the index reached the highest level based on closing prices going back to 2004.

The euro was down 0.2 percent to $1.0842. The yen was little changed at 120.10 per dollar, after jumping more than 1 percent in New York.

Cautious Fed

Speculators had increased wagers on gains in the dollar running before the Fed’s decision on Wednesday to drop an assurance that it will be “patient” in tightening. The Fed kept the door open for interest rate increases this year.

Investors increased wagers on the U.S. currency’s strength versus eight major peers to 435,439 contracts as of March 10, the most in a month, according to Commodity Futures Trading Commission data compiled by Bloomberg.

Given that markets remain fluid, the euro could rise above $1.10 again after briefly topping the level on Wednesday and be a trigger for a broader dollar selling, said Shusuke Yamada, a Tokyo-based currency strategist at Bank of America Merrill Lynch.

Extreme Positions

“Positions had been tilted extremely to one side with most expecting the dollar’s downside would be limited at $1.10,” Yamada said. “So, if the euro goes beyond $1.10, it could further accelerate dollar selling against the euro.”

Policy makers’ estimates for the federal funds rate at the end of 2015 dropped to 0.625 percent, compared with 1.125 percent in December forecasts. The outlook for 2016 was cut to 1.875 percent from 2.5 percent, according to the FOMC’s quarterly Summary of Economic Projections.

“There seems to be a growing consensus among FOMC members that it may be preferable to tighten later and catch up if needed than to tighten early and possibly have to unwind if the economy falters,” ANZ Bank New Zealand Ltd. strategists David Croy and Sam Tuck wrote in a report to clients dated March 19.

Changes in the assessment of the economy are behind the reduced projections, including lower expectations for inflation, Fed Chair Janet Yellen said at a press briefing in Washington on Wednesday. While the strong dollar has weighed on consumer prices, contributing to weak export growth and low import prices, it also reflects strength in the U.S. economy, she said.

“The dollar will resume its uptrend vs G-10 in the next few weeks driven by the pressure of negative interest rates elsewhere,” Sebastien Galy, a senior currency strategist at Societe Generale SA, wrote in an e-mail in New York on Wednesday. “For now, the move is driven by risk management and should moderate by tomorrow afternoon for G-10 currencies.”

The Fed’s move toward higher interest rates contrasts with a backdrop of central-bank easing from the euro area to Australia. Sweden’s Riksbank lowered its key interest rate Wednesday. That divergence in monetary policy has fueled flows into U.S. assets, boosting the dollar to multi-year highs.