Sterling fell after British Prime Minister Theresa May said she was not prepared to delay Brexit further than June 30. Despite the pound's sharp drop, the dollar index hit its lowest level since Feb 4.
The Fed took a more accommodative policy posture, signalling it will not hike interest rates this year in the face of a slowing economy, while announcing a plan to end its balance sheet reduction program by September.
The initial reaction to the Fed throughout markets was towards more risk-taking, and stocks on Wall Street rallied out of negative territory, lifting a global stocks index.
But concern over the Fed's flagging of a weaker U.S. economy, alongside lingering worries about China-U.S. trade talks that are set to resume next week, dragged stocks into the red by the end of the session.
Strong support from the Fed could mean the economy is not in great shape or maybe worse shape than market participants believe, according to Art Hogan, chief market strategist at National Securities in New York.
Hogan added that "maybe there still is some trouble in paradise with the U.S.-China trade talks and that is probably more important” than where the Fed stands on monetary policy.
At the closing bell, the Dow Jones Industrial Average fell 141.71 points, or 0.55 percent, to 25,745.67, the S&P 500 lost 8.34 points, or 0.29 percent, to 2,824.23 and the Nasdaq Composite added 5.02 points, or 0.07 percent, to 7,728.97.
MSCI's gauge of stocks across the globe shed 0.42 percent, its first daily decline since March 8.
The pan-European STOXX 600 index lost 0.90 percent and emerging market stocks lost 0.23 percent.
FED DRAGS DOLLAR LOWER
In currency markets, sterling fell as much as 0.93 percent against the U.S. dollar after British Prime Minister Theresa May asked the EU to delay Brexit until June 30, a shorter extension than some in the market had been expecting, and later said she was "not prepared to delay Brexit any further."
The pound closed the session down 0.54 percent at $1.3195, but that was not enough to lift the dollar index after the dovish Fed statement. The dollar index fell 0.39 percent.
"The dollar has come under pressure against a large number of currencies around the world," said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.
"Overall it seems the Fed was able to solidify their dovish view as there are no rate hikes priced in for this year and only one rate hike for 2020," he said.
The euro rose 0.55 percent to $1.1411, while the Japanese yen strengthened over 0.6 percent versus the greenback at 110.68 per dollar.
In the oil market U.S. crude prices rose to a 4-month high above $60 a barrel after U.S. government data showed tightening domestic oil supplies, but gains were capped by concerns over global economic growth due to the ongoing U.S.-China trade war.
U.S. crude rose 1.18 percent to $59.99 per barrel and Brent was recently at $68.29, up 1.01 percent on the day.
Treasury yields fell after the Fed's statement, with the benchmark 10-year touching a 14-month low. The yield curve was at its flattest so far in 2019.
"There's one hike projected for 2020 but there's a long time between now and then and so the market is effectively taking the view that the Fed is done tightening," said Evan Brown, head of macro asset allocation strategy at UBS Asset Management.
Benchmark 10-year notes last rose 25/32 in price to yield 2.5245 percent, from 2.612 percent late on Tuesday.
The 30-year bond last rose 1-4/32 in price to yield 2.9698 percent, from 3.026 percent late on Tuesday.
Spot gold added 0.5 percent to $1,312.24 an ounce. Copper lost 0.03 percent to $6,457.00 a tonne and palladium hit a record high of $1,608.005 per ounce on concern over tight supplies.
Graphic: Global assets in 2019 - http://tmsnrt.rs/2jvdmXl
Graphic: Global currencies vs. dollar - http://tmsnrt.rs/2egbfVh
Graphic: Emerging markets in 2019 - http://tmsnrt.rs/2ihRugV
(Reporting by Rodrigo Campos, additional reporting by Stephanie Kelly, Kate Duguid, Richard Leong, Saqib Iqbal Ahmed and Lewis Krauskopf in New York; Editing by Bernadette Baum, Dan Grebler and Cynthia Osterman)
By Rodrigo Campos