NEW YORK - August 10, 2010 - The dollar fell against the yen on Tuesday and erased gains against the euro after the Federal Reserve unveiled plans to boost a flagging economy by reinvesting money from maturing mortgage bonds into government debt.

The move marks an important policy shift for the Fed, which just months ago had been debating how to start winding up its various monetary stimulus programs. Fed officials also offered a gloomier outlook on the U.S. economy.

The downgrade to the economic outlook "is a problem for the dollar in general," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, while the move to invest in long-dated Treasury debt has pushed down U.S. bond yields, making the dollar less attractive to global investors.

But while the Fed's move was seen as supportive for risky assets and currencies, strategists said dollar selling may be short-lived.

"The bond market had priced in expectations that they might re-initiate asset buying and they did not do that," Dolan said. "So ultimately, I expect to see U.S. rates move higher from here and that would see the dollar come bouncing back."

John Doyle, senior strategist at Tempus Consulting in Washington, said he expects the euro to have a hard time holding its ground above $1.32 for long.

The dollar has been under pressure for weeks on signs of slower U.S. growth and amid speculation that the Fed could adopt an even more aggressive asset-buying program targeting Treasury and mortgage debt. The Fed wound up massive purchases of government, agency and mortgage debt earlier this year.

The Fed did reiterate its pledge to keep interest rates very low for a long time. Low rates and accommodative monetary conditions are often negative for a currency, partly because they can increase its liquidity.