* Dollar hits 5-year high vs yen, later retreats
* Markets reassured by Fed message on interest rates
* Australian dollar near 3-1/2-year lows
* Euro just off almost two week low of $1.36495
By Laurence Fletcher
LONDON, Dec 19 The dollar struggled to gain
ground on Thursday after the Federal Reserve surprised many
analysts by announcing its long-awaited first cut in bond-buying
but couched it by promising interest rates would stay low for
A large majority of market watchers had expected the Fed to
wait until next year before starting to reduce its stimulus for
the economy but any impact on the dollar - which should in
theory gain as a result - was tempered by the fact that much of
the move had already been priced in by markets.
The Fed 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 - effectively extending the
timeline for beginning to raise base interest rates.
The dollar jumped to a five-year high against the yen
of 104.37 yen after the Fed decision before losing ground to
trade lower at 103.96 yen. Traders said "short" bets on the yen
falling were already stretched near to a maximum and that was
also likely to check any dollar gains in the near term.
"The Fed took with one hand and gave with another," said
Simon Smith, head of research at FxPro. "They sweetened the pill
as much as they could.
"Tapering is not as dollar-positive as it would have been if
it had happened in September." Smith added that while he
expected the dollar to strengthen next year, he did not expect
it to hang onto these gains in the first quarter as fourth
quarter GDP numbers slow compared with the third quarter.
Analysts were united in expecting the Fed's move, put off in
September due to U.S. budget problems, but the central forecast
before Wednesday had been for it to begin tapering off bond
purchases in March.
The actual reduction in monthly asset purchases was minimal
- $10 billion - and they remain at a staggering $75 billion a
month in extra dollars that are coursing through global markets.
The dollar has already risen 20 percent against the yen this
year as the looming tapering contrasted with expectations the
Bank of Japan would further loosen its own monetary policy.
Tapering is seen as positive for the dollar because it would
push up Treasury yields and attract yield-seeking investors. But
crucially two-year U.S. yields fell back on Wednesday
after an initial rise as bond investors took reassurance from
the Fed's message on interest rates.
"We've been calling for 104.70, 105 as targets (for
dollar/yen), and it took this event to get above 104, which was
a bit surprising," said Bart Wakabayashi, head of forex at State
Street Global Markets in Tokyo.
"Institutional investors, asset managers were pretty much
positioned for this taper," he said.
The euro lost ground against the dollar to hit its
lowest in almost two weeks of $1.36495 as investors took profits
from its recent rally. It later recovered some ground to trade
at $1.3686, supported by euro zone banks repaying cheap European
Central Bank loans, thus tightening liquidity.
The Australian dollar, already under pressure because of the
central bank's desire to see it weaken, hovered near a
3-1/2-year low in the wake of the Fed's announcement.
The Aussie fell as far as $0.8820, its lowest since
August 2010, and was last at $0.8860.