* Dollar index struggles near seven-month lows
* Fed maintains pace of QE, sounds super-dovish
* Euro at 7-1/2 month high, NZD sets 4-month high
* Euro at 3-1/2 year high vs yen, Swiss franc at 23-year
high vs yen
By Anirban Nag
LONDON, Sept 19 The dollar struggled near a
seven-month low against a basket of major currencies on Thursday
after the Federal Reserve wrong-footed many investors who had
positioned for a scaling back in its massive stimulus programme.
The safe-haven yen fell 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, another safe-haven currency.
The dollar index was down 0.15 percent, adding to 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 programme at $85 billion a month, confounding
expectations for a reduction of roughly $10 billion.
It has fallen to levels not seen since well before Fed Chief
Ben Bernanke first floated the idea of reducing the stimulus in
The dollar index last stood at 80.113, after having
fallen to 80.060 on Wednesday, its lowest level since February.
It fell as rate-sensitive U.S. Treasury yields, with
which the index has a strong correlation, slid to 0.32 percent
from a recent two-year high of 0.52 percent.
The dollar's losses saw the euro hit a 7-1/2 month
high of $1.3569, with this year's high of $1.3711 the target for
some euro bulls, traders said.
"U.S. yields are lower and it makes sense to move out of
dollars into the euro and sterling," said Jeremy Stretch, head
of currency strategy at CIBC World Markets.
"By the time we have the European Central Bank meeting early
next month, we could have the euro at $1.37 which will pose a
headache to (President Mario) Draghi."
A stronger currency would hurt exports and is the last thing
the ECB would want, given it has pledged to keep monetary policy
accommodative for longer to support a nascent economic recovery.
GROWTH CURRENCIES FARE WELL
Citing tightening financial conditions, Fed Chairman Ben
Bernanke refused to commit to begin 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.
The surprise 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.
"Dollar bulls are seen taking a leave of absence until the
tapering story reasserts itself," Deutsche Bank analysts said in
a note. "In G-10 land, the Fed surprise is likely worth another
2 percent dollar weakness against most pairs, with the notable
exception of a more resolute dollar/yen."
Higher-yielding currencies fared well as the tap for cheap
dollars remained open. The New Zealand dollar climbed 0.8
percent to a four-month high of $0.8436, 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 134.21 while the
dollar rose 1 percent to 99.005 yen, pulling away from
Wednesday's three-week low of 97.76 yen.
The dollar's moves versus the yen were being influenced by
two conflicting factors, the drop in U.S. bond yields on the one
hand and a bounce in risk appetite on the other.
"Going forward it looks like the stock markets will dominate
over interest rate differentials and this will help cross/yen
and dollar/yen," said Ned Rumpeltin, Head of G-10 FX strategy at
Standard Chartered Bank.
"We expect Japanese capital outflows to pick up and that
should weigh down on the yen. The market will be comfortable
with the short-yen positions."