April 28, 2011 / 11:48 AM / 6 years ago

FOREX-Dollar stays weak after Fed, euro may test $1.50

* Dollar index hits 3-yr low, euro hits 17-mth high

* Euro may head toward $1.50, Aussie $1.10

* But euro faces resistance at $1.49, more ahead of $1.50

By Jessica Mortimer

LONDON, April 28 (Reuters) - The dollar plumbed a three-year low against a currency basket on Thursday, while the euro was set to attack a key psychological level of $1.50, as the view that U.S. interest rates would stay low spurred more dollar selling.

The dollar dropped across the board, with the Australian dollar charging through previous highs to a 29-year peak above $1.0900 and looking poised to break $1.10 while both the euro and sterling vaulted to 17-month highs.

Traders and analysts said Asian central banks diversifying dollar proceeds into euros and other currencies was a major factor in the dollar's falls after earlier talk of dollar-buying intervention by several Asian central banks. [ID:nL3E7FS09Z]

Trade calmed a little, however, as the euro stalled ahead of resistance at $1.4900. Traders cited heavy offers from $1.4880 up to $1.4900, as well as a reported options barrier at $1.4900.

The Federal Reserve said on Wednesday it would complete its $600 billion bond-buying programme in June but Chairman Ben Bernanke signalled no rush to tighten monetary policy with the jobs market still in a "very, very deep hole". [ID:nN26291565]

"It's all one way across the board, everyone seems to be betting on a weaker dollar and it seems a pretty safe bet," said Niels Christensen, currency strategist at Nordea in Copenhagen.

"The market is taking on board the more dovish element of the statement and the fact there is no indication of an early rate hike." He added it was "not a bold forecast" to expect the euro to hit $1.50 in the next week or two.

The euro EUR= hit a 17-month high of $1.4882 on trading platform EBS after breaching resistance around $1.4850, the upper part of an uptrend channel since mid-February.

It was last up 0.2 percent at $1.4805, with technical resistance seen at the Dec. 7 peak of $1.4905. Above $1.4900, traders reported more offers at $1.4930 up to $1.4950, where another options barrier was reported.

"The euro is going up because it is the prime reserve alternative to the dollar," said Neil Mellor, currency strategist at Bank of New York Mellon.

Subdued implied volatility in the euro suggested the euro's latest rise could continue in the near term.

Despite a 2 percent rise in the single currency so far this week, one-month implied euro/dollar vols had pulled back to around 10.6 percent EUR1MO= on Thursday, after popping above 11.0 percent earlier in the week.

One-month EUR/USD risk reversals EUR1MRR=ICAP were flat around 0.85 in favour of euro puts, suggesting the premium to sell euros remains relatively low even as investors brush off euro zone debt problems and plough into the single currency.

Many options analysts have been surprised that risk reversals have seen a limited move even as spot euro/dollar climbs higher, which suggests the risk of a sharp turnaround in the euro remains limited at the moment.

Some in the market say a consolidation in spot euro/dollar would be required for risk reversals to start moving lower, while a rise to $1.50 may also push them down.

LOOSE U.S. POLICY

The dollar index, which measures the dollar's value against a basket of currencies, slid to a three-year low of 72.871, and last stood at 73.188 .DXY, down 0.5 percent on the day.

A Reuters poll on Wednesday showed most U.S. primary dealers expect the Fed to keep interest rates near zero until the end of 2011. [FED/R] By contrast the European Central Bank has already raised and the Bank of England are seen likely to raise interest rates later this year. ECBWATCH BOEWATCH

The dollar index has slid nearly 4 percent this month, bringing it closer to a record low of 70.698 hit in March 2008.

The higher-yielding Australian dollar AUD=D4 scaled a fresh 29-year high of $1.0948 and was last up 0.6 percent at $1.0932, while sterling hit a 17-month peak of $1.6747 GBP=D4, and was last up 0.35 percent at $1.6684.

The dollar was down 0.6 percent at 81.74 yen JPY=, with options expiries reported at 81.50 and 82.00 yen. (Additional reporting by Naomi Tajitsu; Editing by Toby Chopra)

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