FOREX-Dollar hits 2-year low vs euro as Fed softens bias

TOKYO, March 22 (Reuters) - The dollar extended its losses on Thursday, hitting a new two-year low against the euro after the Federal Reserve held interest rates steady and dropped a reference in its post-policy meeting statement to possible further rate hikes.

Although the Fed said after its Federal Open Market Committee meeting that inflation was still its main concern, investors took the change in the statement as a sign that a rate cut may be near.

"It seems the FOMC is signaling that growth may slow enough to address inflationary pressures," said currency strategists at Morgan Stanley.

"Until we receive more clarity from Fed officials and the data path, we think the dollar will remain under pressure, particularly against higher yielders."

The euro rose briefly to $1.3412 EUR=, up 0.15 percent from late in New York and hitting the highest point since March 2005. It then edged back down to $1.3395.

The single currency got more of a boost against the dollar as markets expect more euro zone interest rate hikes this year from the current 3.75 percent.

Financial futures showed that the chances of the Fed cutting interest rates by June briefly rose to 48 percent from 24 percent earlier, before easing to 38 percent as the markets digested the FOMC news.

The Fed has held the benchmark fed funds rate steady at 5.25 percent since August.

The dollar showed resilience against the low-yielding yen, holding firm around 117.40 yen JPY= after falling as low as 117.15 yen the previous session.

Traders said the rally in U.S. stocks after the Fed meeting as well as the 1.6 percent rise in Tokyo's Nikkei share average in the morning may boost investors' appetite for increasing their positions in carry trades using low-yielding currencies like the yen as a cheap source of funds to buy higher-yielding currencies.

"The dollar may not fall against the yen -- not just because of its yield advantage, but also because U.S. stocks and bonds may attract Japanese money once the market stabilises," said Shogo Nagaya, a senior dealer at Nomura Securities.

The Dow Jones industrial average gained 1.3 percent .DJI on Wednesday.