* Euro falls, dollar index hits 2-week high
* Euro zone inflation at four-year low, unemployment high
* Market unwinds dollar shorts after Fed announcement
* Fed keeps stimulus in place, not too alarmed on growth
By Jessica Mortimer
LONDON, Oct 31 The euro fell to a two-week low
against the dollar on Thursday after a fall in inflation to its
lowest in nearly four years increased speculation that the
European Central Bank will ease monetary policy further.
Helped by the euro's falls, the dollar hit a two-week high
against a basket of currencies.
The U.S. Federal Reserve sounded somewhat less alarmed about
the pace of the economic upturn than some investors had expected
after a meeting on Wednesday, prodding the dollar higher.
The euro lost 0.7 percent to $1.3638, its lowest
since Oct. 17.
Euro zone flash annual HICP inflation fell to just 0.7
percent in October. This may raise concerns among euro zone
policymakers about deflation risks and damage to the economy
from a strong currency. Euro zone unemployment was at a record
high 12.2 percent.
ECB governing council member Ewald Nowotny said earlier on
Thursday the central bank would provide more liquidity when
cheap long-term loans it made in late 2011 and early 2012
"We have had a nasty combination of a lack of inflationary
pressures and record unemployment, and the market's
interpretation is that the ECB may sit up and take notice," said
Jeremy Stretch, head of currency strategy at CIBC.
"The downside risks for euro/dollar look evident and $1.36
is a near-term target."
The dollar index rose 0.25 percent to 79.984, its
highest since Oct. 17, as it pulled away from a nine-month low
of 78.998 hit on Friday.
The U.S. central bank dropped a phrase in its statement on
Wednesday expressing concern about a run-up in borrowing costs
and made no direct reference to the partial government shutdown
earlier this month.
"The market was expecting a relatively dovish outcome from
the Fed and that's why we've seen some profit-taking. People had
become too bearish on the dollar and too bullish on
euro/dollar," said Arne Lohmann Rasmussen, head of foreign
exchange research at Danske Bank.
The dollar fell 0.3 percent against the yen, however, to
98.19 yen. Weaker equity markets helped the safe-haven
Japanese currency even as three Bank of Japan board members
dissented against the latest semi-annual report, with some
citing stronger downside risks to the economy.
The Australian and New Zealand dollars
also gained against their U.S. counterpart on strong Australian
housing data and after the Reserve Bank of New Zealand
reiterated it was likely to hike interest rates next year.