By Anora Mahmudova and Sara Sjolin, MarketWatch

Pound strengthens after U.K. Parliament votes to trigger Article 50

The dollar tempered its earlier climb and was only modestly higher against the euro and the yen Wednesday after the Federal Reserve left interest rates unchanged and struck a cautious tone about its rate-hike expectations.

Policy makers voted unanimously (http://www.marketwatch.com/story/fed-holds-steady-wanting-more-than-just-rising-confidence-2017-02-01), while the accompanying statement said that business investment remained "soft" even as the "measures of consumer and business sentiment have improved of late."

The ICE U.S. Dollar Index , which measures the greenback against a basket of rivalcurrencies, was up 0.2% at 99.74 late Wednesday in New York, after rising as high as 100 earlier in the day. The index touched the lowest level since mid-November on Tuesday, according to FactSet data.

"Donald Trump's executive orders have shaken the Fed and they do not want to increase rates as aggressively as previously thought. The unanimous decision by the Fed has made it clear that the March meeting may not have much life in that at all," said Naeem Aslam, chief market analyst at ThinkForex.

Earlier, the dollar was boosted by an upbeat report on U.S. private-sector hiring and solid manufacturing data.

Private-sector employers added 246,000 jobs in January (http://www.marketwatch.com/story/private-sector-adds-246000-jobs-in-january-adp-2017-02-01), well above expectations. Investors look at the private-sector jobs report to get a feel for the official nonfarm-payrolls data due Friday. Meanwhile, American manufacturers grew in January (http://www.marketwatch.com/story/us-manufacturers-see-strongest-growth-in-two-years-ism-finds-2017-02-01) at the fastest pace in more than two years and many executives said the outlook "looks stronger" at the start of the 2017.

The dollar has been losing ground after comments from President Donald Trump and his appointees. Tuesday's dollar weakness came after Trump and his trade adviser Peter Navarro hinted the administration would ditch a two-decade-old "strong dollar" policy (http://www.marketwatch.com/story/yen-strengthens-amid-uncertainty-over-trump-boj-stance-2017-01-31), suggesting that Japan, China and Germany were benefiting from weaker currencies.

"Every other country lives on devaluation," Trump said at a meeting with U.S. pharmaceutical executives (http://www.marketwatch.com/story/trump-tells-pharma-ceos-bring-down-drug-prices-2017-01-31) on Tuesday. "They play the devaluation market and we sit there like a bunch of dummies."

The dollar gave up earlier gains against the yen, trading at Yen113.19 late Wednesday in New York, from Yen112.94 late Tuesday.

Euro bump

The euro changed hands at $1.0768 late Wednesday in New York, compared with $1.0795 late Tuesday in New York. The shared currency got a bump higher in the Tuesday session after a U.S. trade adviser told the Financial Times that Germany was using a "grossly undervalued" euro to gain an advantage over trading partners, including the U.S.

Sean Callow, senior currency strategist at Westpac, said the comments come on top of rising tension over a shift in U.S. policy toward protectionism.

"It is increasingly clear that the Trump administration views any large bilateral trade deficit as the result of the U.S. being cheated. As such, Germany is joining China on the trade hit list and will surely stay there," Callow said.

German Chancellor Angela Merkel also rejected the claims at a news conference Tuesday.

SMBC Nikko FX strategist Makoto Noji said investors need to keep watching closely if the latest jawboning has the potential to trigger a eurozone crisis.

Read:6 ways Europe could trigger market turmoil in 2017 (http://www.marketwatch.com/story/6-ways-europe-could-trigger-market-turmoil-in-2017-2017-01-31)

While Noji expects Germany to be relatively immune to any upswing in the euro, a further euro appreciation may deliver a serious blow to less competitive economies, such as Italy and France.

"The negative impact from euro appreciation would be as negligible to Germany as a mosquito bite, but Italy's economy could fall into crisis," he said.

In other currencies, the pound rose to $1.2656 late Wednesday in New York, up from $1.2578 late Tuesday in New York after U.K. members of parliament voted 498 to 114 in favor of triggering Article 50 by the end of March, starting the process by which the country will exit the European Union.

Bank of America Merrill Lynch strategists said they were getting ready to go long on sterling and that aside from some short-term weakness, the "medium-term fundamentals look more positive."

--James Glynn and Hiroyuki Kachi contributed to this article

(END) Dow Jones Newswires

February 01, 2017 17:10 ET (22:10 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.