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NEW YORK (CNNMoney.com) -- Gold pared gains Wednesday after hitting an all time high, but still settled at record levels after the Federal Reserve's latest policy statement came in as expected.

The gold market had rallied earlier in the session amid speculation that foreign central banks would increase their purchases of the precious metal.

But the rally lost some momentum after the Fed announced plans to hold interest rates steady near 0%. The central bank said in a statement that although the economy continues to improve, it expects interest rates to remain low for an extended time.

The dollar, which had languished for most of the day, fell sharply after the statement came out.

December gold was up $2.40 to $1,087.30 an ounce, after hitting an all-time trading high of $1,096.20 an ounce earlier in the session. On Tuesday, gold closed at a record $1,084.90 an ounce.

Gold, which is up 23% this year, surged on Tuesday after the International Monetary Fund said it sold 200 metric tons of the precious metal to India's central bank.

That sale heightened expectations that more overseas central banks will move to increase their gold holdings.

"To have India step in and buy half of the IMF gold was a big surprise," said Joe Foster, a precious metals analyst at Van Eck Global. "It shows that other central banks are looking to buy gold."

Analysts say many monetary policy makers are looking for ways to reduce their exposure to the U.S. dollar, which is the traditional reserve currency of choice for many foreign central banks.

The dollar, which is down 6% this year, has been pressured by concerns about the growing U.S. budget deficit and rock bottom interest rates.

Traders say gold could emerge as the "new dollar" when it comes to reserve currencies.

The IMF is slated to sell another 200 metric tons of gold, and many analysts expect China to be a significant buyer. The Russian central bank has also expressed interest in expanding its gold hoard.

"You have countries that believe gold is going to go higher, otherwise they wouldn't be making these long-term purchases," said Adam Klopfenstein, senior market strategist at commodities brokerage firm Lind-Waldock. "That's the main catalyst propelling the market higher."