* Fed ties policy to specific economic target
* Fed extends debt-buying, in line with expectations
* Yen down across the board on prospects of more easing
By Anooja Debnath
LONDON, Dec 13 (Reuters) - The dollar rose on Thursday, recovering from earlier falls, as traders booked profits on short dollar positions after the Federal Reserve’s decision to add more stimulus was broadly as expected.
Strategists said future dollar moves were likely to be driven by developments in efforts to avert the U.S. “fiscal cliff” and increasingly by U.S. data after the Fed decided on Wednesday explicitly to link its monetary policy path to unemployment and inflation.
The dollar was up 0.08 percent against a basket of currencies at 79.875, recovering from a one-week low of 79.711 hit after the Fed’s decision on Wednesday.
The Fed matched market expectations by saying it would keep buying $45 billion of government bonds each month after its “Operation Twist” programme expires, in addition to buying $40 billion a month in agency mortgage-backed securities.
It said interest rates would remain near zero until unemployment falls to at least 6.5 percent.
“While labour market data has always been an important driver for the Fed, the fact that they have formalised a specific economic target changes the dynamics of currency markets,” said Ian Stannard, head of European FX strategy at Morgan Stanley.
With the Fed actively targeting economic data, the dollar could gain if data shows any sign of improvement, he said.
“I don’t think we can translate further quantitative easing into a weaker dollar.”
The euro was down 0.1 percent at $1.3058, having hit a session low of $1.3040. However, it held above near-term chart support at $1.2923, its 55-day moving average.
Strategists, however, said positive developments in the euro zone and successful bond auctions in Italy could support the euro in the near term.
The European Union reached a deal to make the European Central Bank the bloc’s top banking supervisor -- a move seen as a step closer to resolving the debt crisis.
But traders warned currency moves could be choppy in the approach to year-end as trading volumes decline.
“The moves now are basically people unwinding positions... any such moves are now exaggerated by thin volumes as we move into year-end,” said Neil Mellor, currency strategist at Bank of New York Mellon.
The dollar was at 83.47 yen, down 0.2 percent on the day, having hit a near nine-month high of 83.67 yen in Asian trade.
The dollar was expected to rise further against the Japanese currency on expectations the Bank of Japan will ease monetary policy further.
The BOJ meets next week, after Sunday’s election which looks set to produce a government dominated by the opposition Liberal Democratic Party. LDP leader Shinzo Abe has been pushing the BOJ for more powerful monetary stimulus.
Part of the reason for the rise in dollar/yen was higher U.S. Treasury bond yields, which makes the dollar relatively more attractive against the low-yielding Japanese currency.
Earlier on Thursday the Swiss franc rose against the euro, after the Swiss National Bank maintained its cap on the exchange rate at 1.20 francs per euro but reiterated it was prepared to buy foreign currency in unlimited amounts to maintain it.
The euro fell to a session low of 1.2089 francs, down from around 1.2117 francs before the announcement.