In a fairly muted market reaction, the dollar lost some ground overnight following the

Federal Reserve Bank's

decision to leave U.S. interest rates unchanged.

The forex market is confused over the implications for U.S. interest rates going forward. It is anticipating that future economic data will determine monetary policy. Traders continue to anticipate that another interest rate hike is likely in August and beyond.

"The market's reaction has been a little bit of a surprise," said a trader at a French bank. "The Fed statement seemed to suggest that they were very cautious. There was very little reaction to strong U.S. data yesterday," he said.

Dollar/yen is opening nearly one yen lower at 104.65.

Bank of Japan

governor Masaru Hayami said the end of the zero-interest-rate policy is now in view. "The economy is rapidly approaching a situation in which an end to deflation concerns is in sight," he said. Finance Minister Kiichi Miyazawa said any such decision will be left entirely to the Bank of Japan.

The yen benefited from the announcement that

Fitch IBCA

, the credit-rating agency, has left Japan's long-term foreign currency rating unchanged, although the local currency debt rating was lowered. The market had been concerned that Japan's international credit status was going to be adversely affected.

"The reaction to the Fitch announcement showed that it was a red herring," said a trader.

The euro moved higher overnight and is opening at $0.9505, up half a cent since yesterday.

Bank of France

governor Jean-Claude Trichet again suggested the euro has good prospects. "In the end, a strong economy goes with a strong currency," he said.

The pound is opening firmer at $1.5175. In sterling terms, the euro is stronger at 62.60 pence.

The U.K. first quarter

current account deficit

rose to 4.0 billion pounds, compared with a shortfall of 1.5 billion pounds for the same period in 1999. This was significantly worse than expected.

Dollar/Swiss franc is weaker in line with the general forex market pattern and is opening at 1.6370. The euro is opening firmer at SF1.5560.

U.S. dollar/Canada has so far seen only modest improvement on the Fed decision, which would normally be expected to help the Canadian unit. The U.S. dollar is opening little changed at C$1.4795.

The Australian dollar is steady at $0.6025. The New Zealand dollar is little changed at $0.4670.

The South African rand is again fairly robust and is opening at 6.82.

The Mexican peso has slipped lower and is approaching the 10 pesos per dollar level. The peso is opening at 9.98.

The Polish zloty is unchanged at 4.40 per dollar.