FOREX-Dollar rebounds after steep losses, but outlook grim
* Dollar index hovers near seven-month lows * Fed maintains pace of QE with dovish tone * Euro hits 7-1/2 month high By Gertrude Chavez-Dreyfuss NEW YORK, Sept 19 (Reuters) - The dollar recovered on Thursday, a day after incurring sharp losses as the Federal Reserve shocked investors and unexpectedly kept its stimulus program intact, but its prospects remained bleak with low U.S. interest rates seen staying for some time. Fed Chairman Ben Bernanke, pointing to tightening financial conditions, on Wednesday refused to commit to reducing the bond purchases this year. The Fed also cut growth forecasts for 2013 and 2014, citing strains in the economy from tight fiscal policy and higher mortgage rates. By not tapering, the Fed "has arguably removed the single most bullish prop for the U.S. dollar," said Richard Franulovich, senior currency strategist at WestPac in New York. The safe-haven yen fell on Wednesday too, sliding to a 3 1/2-year low against the euro, as the Fed's decision sparked a rally in riskier assets and currencies. So widespread was the yen sell-off that it also hit a 23-year low against the Swiss franc. "Future tapering has probably ended up being a meeting-to-meeting call once again, beholden to a small handful of economic data points," said Dean Popplewell, chief currency strategist at OANDA in Toronto. "The Fed is correct to be hesitant. Global growth is precarious at best, and turning the taps too tight too soon would have a huge global domino effect." The dollar index was last up 0.2 percent, at 80.373, erasing some of the previous session's 1.1 percent drop, its biggest one-day slide in more than two months, after the Fed kept the size of its asset-buying program at $85 billion a month. The general expectation was that the Fed would reduce its bond purchases by $10 billion. The index has fallen to levels not seen since well before Bernanke in May first floated the idea of reducing the stimulus. On Wednesday, it fell to its lowest level since February. The dollar's losses saw the euro hit a 7 1/2-month high of $1.3568, with this year's high of $1.3711 the target for some euro bulls, traders said. The euro was last little changed at $1.3524. Daniel Katzive, currency strategist at BNP Paribas in New York, however, believes the dollar could eventually fare better against the low-yielding currencies such as the yen, euro, and sterling. He noted that the yen's front-end yields have not changed much with the Fed decision as the Bank of Japan is still very much engaged in its own quantitative easing. "The ECB (European Central Bank) and, at some point, even the BOE (Bank of England) could also turn more dovish in the weeks ahead, offsetting some of the benefit their currencies have seen post FOMC (Federal Open Market Committee)," said Katzive. GROWTH CURRENCIES FARE WELL The surprise Fed decision saw U.S. Treasury yields tumble while riskier assets, like stocks, staged a rally. Near-term implied volatilities also fell, reflecting healthy risk appetite, with sharp swings in currencies unlikely. Higher-yielding currencies fared well as the tap for cheap dollars remained open. The New Zealand dollar climbed to a four-month high, getting an added lift after data showed New Zealand's economy grew at a better-than-expected pace in the second quarter. The rally in riskier assets weighed on the yen. The euro soared to a 3 1/2-year high against the yen of 134.94 while the dollar rose 1.3 percent to 99.22 yen, pulling away from Wednesday's three-week low of 97.75 yen. The dollar/yen peak of 99.58 yen was the highest in four trading sessions. The dollar's moves versus the yen were being influenced by two conflicting factors, the drop in U.S. bond yields and a bounce in risk appetite.
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