FOREX-Dollar tumbles as Fed opts not to cut bond buys for now
* Fed not reducing stimulus, citing weak economy
* Dollar drops to seven-month low vs euro, three-week low vs yen
NEW YORK, Sept 18 (Reuters) - The dollar plunged to a seven-month low on Wednesday after the Federal Reserve shocked investors by deciding to continue its massive stimulus program, citing strains in the U.S. economy. In its statement, the Fed said it would await evidence of a more stable economy before adjusting the pace of its purchases. It also expressed concerns that a sharp rise in borrowing costs could undermine the economy. The market was widely expecting the Fed to reduce its $85-billion-per-month asset-buying program by $10 billion. The Fed also downgraded its forecasts for the U.S. economy. It now sees growth in a 2 to 2.3 percent range this year, down from 2.3 to 2.6 percent in its June estimate. The downgrade for next year was even sharper: 2.9 to 3.1 percent from 3 to 3.5 percent. In his press briefing, Fed Chairman Ben Bernanke said the low fed funds rate will stay as long as the U.S. jobless rate is above 6.5 percent, even though he noted some improvement in the labor market. "The Fed is data-dependent. It does not act because the market wants it to," said Douglas Borthwick, managing director, at Chapdelaine Foreign Exchange in New York. "I continue to believe that tapering will only come when the White House/Congress can introduce a plan to replace some of the easy money that quantitative easing provides. As we go into debt ceiling discussions, that is unlikely to happen, which means no tapering until the data warrants it." Futures prices suggested traders now see a 52 percent chance of a rate hike in January 2015, according to CME Group's Fed Watch. Before the statement, traders were betting that the Fed could raise rates as early as its October 2014 meeting.
The dollar index fell as low as 80.203, the lowest since mid-February. It was last at 80.270, down 1.1 percent. The euro, meanwhile, climbed to a seven-month peak of $1.3511. It last changed hands at $1.3401, up 1.1 percent. Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said with the Fed decision out of the way, he recommends buying dollars ahead of the weekend as the focus will shift to the euro zone with the German elections on Sunday. German Chancellor Angela Merkel is widely expected to win the election but a poll on Wednesday showed her center-right coalition could fall short of a majority. Analysts at Morgan Stanley expect the euro to rise against the dollar in the near term, possibly hitting $1.36. But the bank warned of the risks ahead for the single currency. "We continue to highlight the risk factors for the euro on the horizon, including the German elections on Sunday, where the outcome is becoming increasingly difficult to call," Morgan Stanley said. Against the yen, the dollar fell to 97.85 yen, a three-week low and by late afternoon trading, it was down 1.0 percent at 98.14. The U.S. dollar also dropped to a three-month low versus the Australian dollar and the Swiss franc.