FOREX-US dollar tumbles as Fed says will buy Treasuries

* US dollar tumbles as Fed says will buy Treasuries

* Euro hits two-month peak above $1.34

* UK jobs data disappoints but sterling rebounds after Fed

(Recasts, adds Fed details, adds comment, changes byline)

By Steven C. Johnson

NEW YORK, March 18 (Reuters) - The U.S. dollar plunged on Wednesday, hitting a two-month low against the euro, after the Federal Reserve said it will buy $300 billion of long-dated Treasuries over the next six months to boost the U.S. economy.

The euro surged above $1.34 for the first time since mid-January as analysts feared the Fed’s move would flood the market with dollars and increase already large U.S. deficits.

The Fed also said it would extend mortgage-related debt purchases to help ease credit market conditions.

“Bottom line is that the Fed is adding $1 trillion to its balance sheet and that’s a lot of taxpayer money,” said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington. “Interest rates now are effectively negative across the board. The dollar is selling off because this may contribute to long-term weakness in the currency.”

The euro was last up 2.8 percent at $1.3379 EUR=. Earlier it hit $1.3427, its highest level since Jan. 12. The dollar fell to 95.69 yen before edging back to 96.20 yen JPY=, down 2.4 percent. It shed 2.8 percent to 1.1493 Swiss francs CHF=.

Sterling rose 1.2 percent to $1.4224 GBP=, rebounding from earlier losses seen after data showed a record number of Britons filed for jobless benefits last month.

The Fed’s move comes after central banks in Britain, Japan and Switzerland have embraced some form of quantitative easing, the process of flooding the banking system with funds to promote lending when interest rates are already at zero.

That leaves the European Central Bank as one of the few major central banks to stop short of such extraordinary measures. Euro zone benchmark rates remain at 1.5 percent, compared with rates at or near zero elsewhere.

However, worsening economic conditions throughout the world mean dollar weakness may not last long, said Robert Blake, senior currency strategist, State Street Global Markets, Boston.

“I don’t know that we’re going to see sustained declines in the dollar, which would require a persistent improvement in risk appetite and I’m not sure we’re there yet,” he said.

The dollar is seen as the safest store of value at time of contracting global growth and its role as a funding currency outside Europe has lent it support during the crisis.