As was widely expected, the Federal Open Market Committee left its target fed funds rate unchanged at Tuesday's policy meeting. Somewhat unexpectedly, the FOMC said the risks are weighted toward economic weakness, which put additional pressure on an already sinking dollar.

After punting on the risk-assessment statement in March, the FOMC surprised some market participants by reinstating it Tuesday with a bias toward economic weakness.

"The Committee perceives that over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal," the statement said. "In contrast, over the same period, the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. The Committee believes that, taken together, the balance of risks to achieving its goals is weighted toward weakness over the foreseeable future."

In reaction to the Fed's announcement at 2:15 p.m. EDT, major stock proxies immediately fell from earlier highs, then rallied to intraday peaks before retreating again. After trading as high as 8641.22, the Dow Jones Industrial Average closed up 0.67% to 8588.36. The S&P 500 finished higher by 0.85% to 934.39 vs. its intraday best of 939.61, while the Nasdaq Composite closed up 1.31% to 1523.71 vs. its apex of 1531.80.

Treasuries rallied in reaction to the Fed announcement after struggling early following poor demand for the three-year note auction. The benchmark 10-year note ended up 22/32 to 100 2032, its yield falling to 3.77%.

The dollar, which was getting pummeled prior to the Fed meeting, weakened further, with the euro breaking through the $1.14 level vs. $1.1365 shortly after 2 p.m. EDT. The dollar also weakened vs. the yen and other major currencies. Late in New York trading, the euro was at $1.1438.

The Fed's statement hinted that more rate cuts may be forthcoming, which would further undermine the dollar's relative attractiveness to foreigners. The European Central Bank's target rate, for example, is currently double the Fed's current target of 1.25%; this yield discrepancy now seems likely to be expanded in the coming months.

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