However, “There was some ‘just-in-case’ position squaring overnight,” wrote David Watt, of RBC Capital Markets. “The market is poised to jump on any sign of a pause and elevated inflation concerns to justify the exceptionally premature speculation about a rate hike by year end.”

The Fed’s rhetoric will be scrutinized almost as much as what it does, since inaction now won’t be taken as an end to falling rates unless the Committee is decisive about it.

“We’re not calling the end of the rate cuts,” wrote Ashraf Laidi, chief foreign exchange strategist at CMC Markets US.

“Regardless of whether the Fed holds rates unchanged in June, we expect the easing campaign to resume” in the third quarter, Laidi said, citing a persistent credit crunch, slack labor markets and the continued slowdown in housing.

The euro was hammered by a much weaker-than-expected German business sentiment reading. The closely-watched Ifo Institute’s index posted an April reading of 102.4, down from 104.8 in March, far below expectations for a dip to 104.3. The index is at its lowest point since January 2006.

European monetary officials subtly backtracked on interest rates Thursday, with ECB President Jean-Claude Trichet, ECB executive board member Juergen Stark and ECB governing council member Michael Bonello all suggesting a rate hike is not in the cards.

The buck quickly responded to this “looming potential of a narrowing in gap between the monetary policy stance of the Fed and the ECB,” wrote David Watt, of RBC Capital Markets.

On this side of the pond, more dismal housing numbers rolled in. Despite price-slashing by builders, new-home sales still plunged by 8.5% to a 17-year low in March, the Commerce Department said. New-home sales are down 36.6% compared with a year ago and are off 62% from the peak in July 2005.

And even those numbers may be optimistic, because they don’t account for canceled sales, which have ballooned. The report is based on contracts signed, not sales closed.

Finally, Commerce also said that orders for durable goods slipped 0.3% in March, marking the third monthly decline in a row, in line with expectations.