* Fed cuts bond-buying but stresses easy policy
* Dollar rallies more than 1 percent vs yen, gains vs euro
* Yen pressured as Japan posts 17th straight trade deficit
By Wanfeng Zhou
NEW YORK, Dec 18 The dollar rallied to a more than five-year high against the yen on Wednesday after the Federal Reserved surprised some investors by paring its bond-buying stimulus program, saying it expects to reduce it further if the economy continues to improve.
The euro's losses against the dollar were more limited as the Fed sought to temper the move by suggesting its benchmark interest rate would stay lower for even longer than previously promised.
"Many thought the Fed would put off a taper until next year. But the Fed acted, sticking to an earlier prediction that it could moderate stimulus by the end of the year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.
"The arrival of a Fed taper erases a layer of uncertainty that has held back the dollar, pointing to brighter prospects for the economy and the dollar," he added.
The dollar rose 1.4 percent to 104.05 yen, having earlier climbed to a session peak of 104.16 yen, its strongest since October 2008.
The euro last traded down 0.6 percent at $1.3690, after touching $1.3673, the pair's lowest since Dec. 6.
The dollar index, which tracks the greenback against a basket of six currencies, added 0.5 percent to 80.458.
The Fed said it would reduce its monthly asset purchases by $10 billion, bringing them down to $75 billion. It trimmed equally from its purchases of mortgage and Treasury bonds.
But in a move likely meant to forestall any sharp market reaction that could undercut the recovery, the U.S. central bank also said it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the U.S. jobless rate falls below 6.5 percent.
Fed Chairman Ben Bernanke said that if jobs gains continue as expected, the bond purchases would likely continue to be cut at a "measured" pace through much of next year. They would probably be wound down "late in the year, certainly not by the middle of the year," he said.
"You can call this tapering, but they still haven't given us a real end point," said Axel Merk, president of Merk Investments in Palo Alto, California.
"They're just caving in to market pressure to do something. But real tapering would have involved giving an end point for when they will stop increasing the balance sheet. They're still giving the impression that they'll be late raising rates, so I'm not sure how hawkish this really is."
A rally in U.S. stocks after the Fed decision further pressured the yen, which is often seen as a safe-haven asset and tends to fall as investor appetite for risk increases.
The euro gained 0.8 percent to 142.45 yen.
"The action today finally gets the uncertainty of when they would taper out the way which is another helpful factor for risk," Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York.
"The yen will remain the favored funder, but the dovish taper will set the tone for a somewhat softer dollar against most other currencies into year-end," he said.
Further pressuring the yen were data showing Japan posted a deficit of 1.29 trillion yen ($12.56 billion) in November, marking a record 17 straight months of deficits as a weak yen inflated the cost of imported fuels.