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NEW YORK (Reuters) - The U.S. dollar fell along with bond yields on Wednesday after the Federal Reserve left U.S. interest rates unchanged and hinted at a less aggressive outlook for rates.
U.S. stocks initially added to gains following the Fed statement but ended lower amid concerns about economic growth.
Worries that Britain, the world's fifth-largest economy, could quit the European Union after a June 23 referendum added to the day's volatility. Some recent opinion polls have put the "Leave" campaign ahead, though bookmakers' odds still favor a vote to remain.
In its statement, the U.S. central bank lowered its economic growth forecasts for 2016 and 2017 and indicated it would be less aggressive in tightening monetary policy after the end of this year. Fed Chair Janet Yellen said at a news conference that Britain's vote on the EU "is certainly one of the uncertainties that we discussed."
Strategists said that while the Fed decision to leave rates unchanged was widely expected by investors, its statement was surprisingly cautious.
"The tone of the statement is absolutely dovish and that was reflected in the fact that the dollar was sold off, not super aggressively, but we did see it move," said Joe O'Leary, senior foreign exchange trader at Silicon Valley Bank in Santa Clara, California.
The Fed did signal that it still plans to hike rates twice this year, but fed funds futures, based on the CME Group's FedWatch, moved to price in just a 10 percent perceived chance of a July rate hike.
Against the yen, the dollar dropped to its lowest in more than two years after the Fed statement. It fell to 105.50 yen, the lowest since mid-October 2014 before recovering to 105.97, down 0.1 percent. The euro gained against the dollar, up 0.5 percent to $1.1265.
U.S. stocks ended down for a fifth straight session - the S&P 500's longest losing streak since the five-day decline that culminated in its 2016 low on Feb. 11.
The Dow Jones industrial average ended down 34.65 points, or 0.2 percent, to 17,640.17, while the S&P 500 lost 3.82 points, or 0.18 percent, to 2,071.50 and the Nasdaq Composite dropped 8.62 points, or 0.18 percent, to 4,834.93.
MSCI's all-country world stock index was up 0.3 percent, while the FTSEurofirst 300 finished up 0.9 percent.
In the bond market, benchmark 10-year U.S. Treasury notes rose 6/32 in price to yield 1.590 percent. Treasury prices, which move inversely to yields, were on track to rise in most maturities for a seventh straight session.
Oil prices fell for a fifth straight day, their longest losing stretch since February, on worries over the vote in Britain.
Brent crude futures' front-month fell 86 cents, or 1.7 percent, to settle at $48.97 a barrel, while U.S. crude fell 48 cents, or 1 percent, to settle at $48.01.
Gold hit a six-week high, climbing for the sixth straight session after the Fed statement. Spot gold was up 0.7 percent at $1,293.86 an ounce.
Additional reporting by Gertrude Chavez-Dreyfuss in New York; Editing by James Dalgleish