FOREX-Dovish Fed takes edge off dollar rally

Wed Jul 30, 2014 7:42pm EDT

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By Ian Chua

SYDNEY, July 31 (Reuters) - The U.S. dollar held below a 10-month peak against a basket of major currencies early on Thursday, having soared at first on upbeat growth data only to have a dovish Federal Reserve take some steam out of the rally.

The dollar index last traded at 81.422 after rising as far as 81.545 - a high last seen in mid-September. Still, the index is up more than 2 percent so far this month, on track for its biggest monthly gain in over a year.

Dollar bulls took heart after the U.S. economy rebounded sharply in the second quarter, with gross domestic product (GDP) motoring at a 4.0 percent annualised pace.

That outcome was well above the 3.0 percent consensus and a smart turnaround from a 2.1 percent contraction in the first quarter.

Despite that, the Fed gave no signs it was in a hurry to raise interest rate. It delivered a slightly more upbeat assessment on the economy and scaled back its monthly bond-buying program by another $10 billion in a widely expected move.

"The accompanying statement was relatively dovish on the labour market, with the Fed keen to retain the message that rate hikes are some time away," said Spiros Papadopoulos, senior economist at National Australia Bank in Melbourne.

Still, the two-year Treasury yield jumped to its highest in over three years at 0.59 percent, which in turn helped boost the allure of the U.S. dollar.

Against the yen, the greenback climbed to a four-month high of 103.15, before steadying at 102.85 early in Asia. The euro skidded to a near nine-month trough of $1.3366 but recovered most of its losses to last stand at $1.3394.

Not helping the common currency, data showed annual inflation in Germany slowed to 0.8 percent in July, an outcome that pointed to another soft reading for EU-wide inflation due out later in the day.

"We remain constructive on the USD and continue to run long USD/JPY and short EUR/USD recommendations," analysts at Barclays wrote in a note to clients.

The dollar also fared well against higher-yielding currencies such as the Australian dollar, which plumbed a two-month low of $0.9301 before edging back to $0.9324.

Traders expect markets to now take stock of the overnight moves and wait for the next batch of key data including U.S. employment on Friday. Manufacturing surveys in China and the euro zone will also be closely watched.

Another month of healthy U.S. jobs growth will only embolden dollar bulls, with markets continuing to look for signs of when the Fed will eventually lift interest rates. (Editing by Eric Meijer)

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