Attention however was focused on the accompanying statement where the central bank made significant adjustments to its language.

Gone was any reference to policy “accommodation”, a phrase which the market had taken as implying the Fed was aiming to take the key Fed funds target to a neutral level that it had not yet reached.

Speculation the bank might change the language began last month after the minutes of its November meeting showed that the timing of changes had been discussed.

But before the doves got too excited, the statement also warned that the Fed “judges that some further measure policy firming is likely to be needed” – leaving the door open to some further tightening.

Shortly after the announcement, the euro had risen from $1.193 to $1.196 against the dollar. The US currency also dropped to Y119.7 from Y120.15 against the yen.

Earlier, the dollar had been lifted by clarification from Yu Yongding, an adviser to the Bank of China’s monetary policy committee.

The greenback’s sharp Monday sell-off had been partly down to a suggestion by Mr Yu that China and other east Asian nations should work together to slow their rate of accumulation of dollar reserves and ought eventually to cut holdings to reduce the risk of a large capital loss if the dollar declined again.

However, Mr Yu calmed sentiment yesterday when he said China would not take “drastic action”, adding that any changes were likely to be “gradual”.

The euro managed modest gains, edging up to Y143.17 against the yen, £0.6747 versus sterling and SFr1.5448 against the Swiss franc after the ZEW index of German business sentiment overshot forecasts, climbing from 38.7 in November to 61.6 in December.

It was the highest reading since February 2004 and a change that even the ZEW Institute itself called “remarkable”.

As investors continued to look ahead to 2006, the overarching view remained one of dollar bearishness.

The BNP Paribas/I&PE; investment managers’ expectations indicator for December found a net 16 per cent of real money managers expect the euro to rise against the dollar, the highest level since April.

The Merrill Lynch December fund manager survey, also released on Tuesday, painted a similar picture, with a net 25 per cent of respondents believing that the dollar was overvalued (up from 21 per cent in November), and a net 57 per cent arguing that the yen was undervalued (from 50 per cent last month).

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