FOREX-U.S. dollar slumps as Fed, ECB actions weigh

* Euro seen extending rally to $1.35-1.36
* Yen falls on anxiety about intervention

By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 14 (Reuters) - The dollar dropped against
most currencies on Friday, hitting a more than four-month low
versus the euro a day after the Federal Reserve announced a
fresh round of monetary stimulus to boost a still lackluster
U.S. economy.
The Fed on Wednesday said it would embark on another phase
of quantitative easing, by buying $40 billion of mortgage-backed
debt per month until the outlook for U.S. jobs improved
substantially. It also expects benchmark U.S. interest rates to
stay near zero until at least mid-2015.
In the Fed's previous two rounds of QE, it bought about $2.3
trillion in bonds to lower long-term rates. While lower rates
may prompt more U.S. business and residential investments, they
are viewed as negative for the dollar as there is less incentive
for foreigners to buy what could be lower-yielding U.S. debt.
Some market players said the Fed's announcement and the
European Central Bank's plan agreed last week to lower
peripheral euro zone economies' borrowing costs could see the
euro extend its rally toward $1.35 in the near term.
"The Fed's decision and the ECB's action together are
decisive and consequential and should underwrite risk appetite
well into next year." said Richard Franulovich, senior currency
strategist at Westpac Securities in New York.
Commodity currencies including the Australian and Canadian
dollars also rallied against the greenback, pushing the dollar
index to 78.601, its lowest in more than four months. The
index was last at 78.702, down 0.7 percent.
The dollar, however, gained against the yen, which fell
broadly on speculation Japanese authorities could intervene to
cap its recent gains against the dollar. Expectations that the
Bank of Japan could ease policy next week in response to the
Fed's action will also likely undermine the yen, traders said.
The dollar rose more than 1.0 percent against the yen to
78.30 yen. It had hit a seven-month low of 77.11 yen on
Thursday.
The euro hit a peak of $1.3168, its strongest level
since early May. It was last at $1.3148, up 1.2 percent, as a
drop in bond yields in smaller euro zone economies prompted
investors to buy the currency. The euro zone single currency
rose 2.6 percent this week, its best weekly performance since
late January.
The euro has gained 4.5 percent against the dollar so far in
September, helped by the ECB's bond-buying scheme and the German
Constitutional Court backing the euro zone's bailout fund. It is
up more than 8 percent from late July's two-year low of $1.2042.
Europe's common currency also rose to an eight-month high
against the Swiss franc at 1.2179 francs and hit a
four-month high against the yen of 103.00 yen. On the
week, the euro gained 2.6 percent versus the yen, its highest
weekly gain since June.
The dollar fell to 0.9235 Swiss franc, its lowest
since mid-May. The Australian dollar hit a one-month high
of US$1.0624 as riskier assets rallied.
Risk-taking was also helped by better-than-expected U.S.
retail sales last month, which rose 0.9 percent, the largest
gain since February. A jump in the Thomson Reuters/University
Michigan consumer sentiment index this month also boosted risk
appetite.

YEN LOSSES
The pledge of stimulus by the Fed should weaken the dollar
and reduce other countries' export competitiveness, making
markets wary that authorities might seek to counter this.
The Bank of Japan meets next week to decide on monetary
policy and the Ministry of Finance has increased its threats to
intervene in the currency market in the past few days.
"Of all the central banks that feel they will be drawn into
a currency war by the Fed's action, the BoJ/MoF may feel the
pressure most acutely," Jane Foley, senior currency strategist
at Rabobank said in a note.
Traders in Asia said the BOJ, which conducts currency
intervention on behalf of the finance ministry, checked rates on
Thursday after the Fed's decision. Such checks are seen as a
sign authorities may be edging closer to intervening.