Dollar strengthens after Fed statement

NEW YORK (CNNMoney.com) -- The dollar extended its gains against the euro and rose against the yen Wednesday, after the Federal Reserve announced plans to hold interest rates steady as it said economic conditions continued to pick up.

What prices are doing: The dollar rose less than half a percent against the euro to $1.4023. It recovered earlier losses against the yen and rose a third of a percent to ¥90.01. The greenback erased some losses versus the pound, but remained weak at $1.6169.

What's moving the market: In a widely expected move, the U.S. central bank said it would hold interest rates steady near zero and added that rates will remain low for an "extended period" of time.

Although job losses are slowing, the Fed said the labor market and business investment continue to lose ground and that "the pace of economic recovery is likely to be moderate for a time."

As previously announced, the Fed said that by Feb. 1, it will wind down its various asset purchase programs, implemented last year during the financial crisis.

Earlier in the day, a government report showing that new home sales plunged to a 9-month low in December also boosted the dollar. The seasonally adjusted annual rate of new home sales dropped 7.6% to 342,000 last month. Analysts surveyed by Briefing.com had expected December sales of new homes to hit an annual rate of 366,000.

Meanwhile, traders said the market is also bracing for President Obama's first State of the Union address at 9 p.m. ET.

What analysts are saying. Boris Schlossberg, director of currency research at trading firm GFT, said the traders' reaction to the statement is "modest because the Fed isn't suggesting a major shift in policy just yet, but it is removing liquidity from the market and getting closer and closer to tighening policy."

He also said the importance of Obama's speech for the currency market should not be underestimated.

"President Obama has seen his political capital contract as the electorate is increasingly frustrated with lack of progress on the economic front," he wrote in a research note to clients.

"If President Obama cannot regain his political momentum the greenback could lose some of its luster as a safe haven instrument with markets beginning to focus on the disarray in U.S. fiscal policy," he added.