SYDNEY The dollar drifted off a seven-month low against a basket of major currencies on Friday as investors unwound some of the bearish trades put on in reaction to the Federal Reserve's shock decision to maintain its massive bond-buying stimulus.
The turnaround came as U.S. Treasury yields rose after a string of upbeat U.S. data suggested that rising market rates, that had so concerned the Fed, were weighing only modestly on the economy.
As a result, the dollar index .DXY climbed to 80.365, pulling up from a seven-month trough of 80.060 plumbed on Wednesday.
Against the yen, the greenback erased all of its Fed-induced losses to trade near 99.50, well off Wednesday's low of 97.76. The euro retreated to $1.3529 from a 7-1/2 month peak of $1.3569.
The rebound in the greenback knocked the Australian dollar to $0.9445 from a three-month peak of $0.9530.
"We think the dollar is likely to recover quickly versus the lower yielding currencies in the G10," analysts at BNP Paribas wrote in a client note.
U.S. data on Thursday showed U.S. home resales surged in August to a 6-1/2-year high and factories grew busier in the Mid-Atlantic region this month, underscoring recent signs of gathering economic momentum that's likely to keep traders speculating about the timing of the Fed taper.
A standout mover was euro/yen, which rallied to a near four-year high of 134.95, partly because investors tend to sell the Japanese currency in favor of higher-yielding assets when risk appetite is strong. It last stood at 134.50.
The Fed on Wednesday confounded many in the market by keeping its $85 billion monthly asset-buying program and sounding super dovish. Market consensus had been for a modest cut of around $10 billion to the bond-buying stimulus.
The surprise decision sparked a rally in global equities and emerging market assets. It also led investors and analysts to push out the timing for when the Fed will begin scaling back stimulus.
"We now expect the Fed to start tapering in December 2013, to be completed in June 2014, with the first hike in June 2015," analysts at Barclays Capital said.
Many will go back to watching U.S. economic data to gauge the strength of the recovery and hence chances of the Fed tempering policy support.
There is no major economic data to speak of on Friday, so all eyes will be on a speech by Bank of Japan Governor Haruhiko Kuroda and any comments he might make regarding the Fed's decision.
On Sunday, the outcome of Germany's general election will be closely watched. Chancellor Angela Merkel looks to secure a third term but there are doubts that she will be able to maintain her center-right coalition, which could complicate her euro zone policy.
(Editing by Shri Navaratnam)