* Dollar index steady after posting biggest one-day gain in 7 months
* Euro wallows around one-month lows against dollar
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Feb 21 The U.S. dollar held firm on Thursday after minutes of the Federal Reserve's last policy meeting showed some policymakers thought the Fed may have to slow or stop buying bonds before seeing a pick-up in employment.
The greenback also benefited from talk overnight that a hedge fund had been liquidating large positions in commodities.
The minutes from the January meeting of the Federal Open Market Committee, the U.S. central bank's policy-setting group, showed "a number of participants" expressed concern over the risks of continued asset purchases.
"The FOMC minutes were largely behind the dollar's rise," said Mitul Kotecha, Hong Kong-based head of global currency strategy at Credit Agricole.
As the Fed considers the eventual end of its asset buying, the dollar stands to gain against the currencies such as Japan, whose central bank is playing "catch-up" in easing policy, he said.
The dollar was slightly higher against the yen at 93.58 yen , having already gained about 8 percent against the Japanese currency so far this year.
The yen has been the worst performing major currency so far this year as investors bet on more aggressive policies from the Bank of Japan to reflate the world's third-biggest economy.
The hawkish impression the minutes left on market sentiment was mitigated by warnings from other Fed members about the dangers of ending the bond-buying programme prematurely, but the greenback was further bolstered by rumours that a large commodity hedge fund had been forced to liquidate its holdings.
Investors used the minutes and the hedge-fund rumours as a further excuse to cut bearish dollar positions, driving the dollar index up 0.8 percent on Wednesday, its biggest one-day gain in seven months. It was last at 81.116, up 0.1 percent, after rising as high as 81.128, its highest level since Nov. 21.
The resurgent dollar saw the euro skid as low as $1.3258 , its lowest since Jan. 11 and well off Wednesday's session high of $1.3434.
It has broken below initial support at $1.3310, the 38.2 percent retracement of its Nov-Feb rally. The common currency was last down 0.2 percent at $1.3260, below its 55-day moving average at $1.3288.
Sterling remained under pressure after minutes of the Bank of England's last meeting showed the governor and two other officials voted to restart buying bonds, suggesting the BOE may be closer than expected to taking more action.
Sterling plunged to its lowest in over two years on Wednesday at $1.5192, before recovering just a bit of ground to buy $1.5219 on Thursday.
The Australian dollar dropped to a more than one-week low of $1.0234. A break below $1.0227 will take it back to levels not seen since October.
Australia's central bank governor testifies before parliament on Friday, a twice-a-year event that is usually closely watched by investors.
Recent comments from the Reserve Bank of Australia indicated it had switched to a wait-and-see mode, having already slashed its cash rate by 175 basis points in the past 15 months to a record low of 3.0 percent.
Markets are awaiting flash PMI's on the eurozone later in the day.
Investors also will be combing U.S. data later on Thursday for more signs of a stronger economic recovery. The weekly jobless claims report, a survey on the manufacturing sector and home sales are all scheduled for release.