* Fed's decision to extend bond purchases undermines U.S. dollar
* Long-term Treasury purchases to start at $45 bln per month in 2013
* Dollar at eight-month peak versus yen on BOJ expectations
By Daniel Bases
NEW YORK, Dec 12 (Reuters) - The euro extended its gains against the U.S. dollar on Wednesday after the Federal Reserve, as expected, left benchmark U.S. interest rates unchanged and said it would extend its bond- buying economic stimulus program into 2013.
The Fed's program, which has also kept interest rates in a range of zero to 0.25 percent for four years, is being beefed up with a commitment to purchase $45 billion monthly in long-term U.S. Treasuries. This is in addition to buying $40 billion a month in agency mortgage-backed securities.
Market expectations for the program were well flagged by investors and resulted in sharp, but short-lived moves against the greenback. The extra spending floods financial markets with cash, reducing the buying power of the U.S. currency.
The Fed hopes the cash will spur extra spending and investment and result in longer-term hiring to push the unemployment rate below 6.5 percent. Rates will stay low as long as the jobless rate is above that level, the first time the Fed has tied an economic target to its benchmark interest rate.
"Considering the meager success of the past four years in fostering economic growth with asset purchases, the Fed finds itself in a policy box with no exit, unable to improve the economy but afraid to temper its stimulative policies for fear that the economy will collapse," said Joseph Trevisani, chief market strategist at Worldwide Markets, in Woodcliff Lake, New Jersey.
"This will have very little impact on the dollar as it is a continuation of current policies and has already been priced in," said Trevisani.
In the aftermath of the Fed's announcement, which caused a sharp decline in U.S. Treasuries prices and a surge in U.S. stock prices, the euro climbed to a fresh intra-day high of $1.3096, up roughly 0.70 percent according to Reuters data.
However, the dollar maintained its gains on the yen to hold near an eight-month peak on bets the Bank of Japan will implement more aggressive monetary easing after an election on Sunday that is expected to yield a victory for the Liberal Democratic Party.
The dollar last traded at 83.12 yen, up 0.72 percent and just off the session high of 83.20 yen, according to Reuters data.
"It's additional (Quantitative Easing), which should be risk positive at the margin. Yields are backing up a bit, which should be supportive for dollar-yen," said Brad Bechtel at Faros Trading in Stamford, Connecticut.
"It underpins the equity market and, to me, is a nice framework for a risk rally that I would expect to carry over into the first quarter. The fiscal cliff is obviously a concern but if we get through that, it should be risk-positive," he said.