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

* Euro seen extending rally
* Euro bailout fund operational next month
* Yen falls on anxiety about intervention
* Focus on bank of Japan meeting next week

By Julie Haviv
NEW YORK, Sept 14 (Reuters) - The dollar tumbled broadly on
Friday, falling against the euro to the lowest in more than four
months a day after the Federal Reserve announced a bond-buying
program to bolster the economic recovery.
The Fed's decision, plus more confidence about the euro zone
debt crisis after recent European Central Bank action, have the
single currency on track for a 2.3 percent gain against the
greenback this week, its best weekly performance since late
January. The dollar has fallen against the euro for four
straight sessions.
The Fed on Thursday 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.
"They are saying they want 200,000 to 300,000 new jobs per
month for a prolonged period of time, and if they do not get
that, they are not done," said Alessio de Longis, portfolio
manager of the Currency Opportunities Fund at OppenheimerFunds
in New York.
"The ECB's recent pledge to buy bonds of troubled euro zone
countries has also encouraged investors to buy euros," he said.
"We should be able to get to $1.35 in the euro simply based on
additional short-covering by investors who have been
dramatically underweight the euro and European equities."
"And a month from now, if European data starts surprising to
the upside, there is plenty of room to build fresh euro longs
that could take us to $1.40," he said.
The euro hit a peak of $1.3168, its highest level
since early May. It was last at $1.3106, up 0.9 percent, as a
drop in bond yields in smaller euro zone economies prompted
investors to buy the currency.
The euro has gained 4.2 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.
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.
"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.
The euro zone's permanent bailout fund will be up and
running at the end of next month, the chairman of the Eurogroup
of finance ministers said on Friday, two days after Germany's
top court gave it the go-ahead.
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.
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. 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
development.
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.
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.
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 hit a seven-month low of 77.11 yen on Thursday.
It last traded up 1 percent at 78.28 yen yen, according
to Reuters data.