October 30, 2013 / 3:42 AM / 4 years ago

Dollar holds gains after Fed steers clear of ultra-doves, BOJ next

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul August 2, 2013.Kim Hong-Ji

SYDNEY (Reuters) - The dollar hovered near a two-week high against a basket of major currencies early in Asia on Thursday, having extended gains after the Federal Reserve kept its massive bond-buying stimulus in place in a widely expected decision.

Investors had been taking profits on very bearish dollar positions in the days leading up to the Oct 29-30 policy meeting and continued to do so after the Fed did not sound quite as alarmed about the state of the economy as some had anticipated.

The U.S. central bank said it would keep buying $85 billion in assets per month and sounded only slightly less optimistic about growth. However, it dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.

"The USD's ability to rally simply on lack of new negative news from the Fed adds more evidence to suggest that the market has become uncomfortably short USD," analysts at BNP Paribas wrote in a client note.

The dollar index last stood at 79.781.DXY, having peaked at 79.905, a high not seen since Oct 17, pulling further away from a 9-month trough of 78.998 plumbed Friday.

Against the yen, the dollar bought 98.53, not far from a two-week peak of 98.69 set overnight, while the euro traded at 135.24 after extending to a 1-1/2 week high of 135.45.

The euro slipped to $1.3721 from Wednesday's high of $1.3787, and briefly tested chart support around $1.3695, a level representing the 38.2 percent retracement of its Oct 16-25 rally. Traders said a break there could extend the euro's fall to major and pivotal support at $1.3645/55.

With the Fed meeting out of the way, traders expect the market to go back to watching U.S. economic data before deciding on whether to continue unwinding short dollar positions.

The weekly U.S. jobless claims and the Chicago PMI business barometer report are due later in the day.

In Asia, the outcome of the Bank of Japan policy meeting will be in focus, although the BOJ is expected to maintain its ultra-loose monetary policy. It could also lift its long-term economic forecasts.

Another standout performer was the New Zealand dollar, which staged a dramatic turnaround from a six-week trough and pulled into positive territory after the Reserve Bank of New Zealand reiterated its outlook for interest rate hikes next year.

The kiwi dollar traded at $0.8244, having bounced off a six-week low of $0.8193.

Traders said some investors were also forced to cover short kiwi positions as they had expected the RBNZ to sound more dovish to temper a buoyant local dollar.

But all the RBNZ said was that a strong currency would give it flexibility on when to hike rates and by how much.

"There was quite a lot of anticipation that the statement would be softer ... it appears that the market was overly anticipating a dovish statement," said Nick Tuffley, chief economist at ASB Bank.

"But there's no reference to the dollar being overvalued, there's no suggestion of intervention coming, it's more of a reference to the obvious monetary policy response to a high exchange rate."

Additional reporting by Naomi Tajitsu in Wellington; Editing by Shri Navaratnam

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