FOREX-Dollar near seven-month low after Fed surprise
* Dollar index struggles near seven-month lows
* Fed maintains pace of QE with dovish tone
* Euro at 7-1/2-month high,
NEW YORK, Sept 19 (Reuters) - The dollar struggled near a seven-month low against a basket of major currencies on Thursday after the Federal Reserve surprised many investors, who had positioned for a scaling back in its stimulus program, by leaving policy unchanged.
Fed Chairman Ben Bernanke, citing tightening financial conditions, on Wednesday refused to commit to begin reducing the bond purchases this year. The Fed also cut growth forecasts for 2013 and 2014, citing strains in the economy from tight fiscal policy and higher mortgage rates.
The safe-haven yen fell too, sliding to a 3-1/2-year low against the euro, as the Fed's decision sparked a rally in riskier assets and currencies. So widespread was the yen sell-off that it also hit a 23-year low against the Swiss franc, another safe-haven currency.
"Future tapering has probably ended up being a meeting-to-meeting call once again, beholden to a small handful of economic data points," said Dean Popplewell, chief currency strategist at OANDA in Toronto. "The Fed is correct to be hesitant. Global growth is precarious at best, and turning the taps too tight too soon, would have a huge global domino effect"
The dollar index was last little changed after the previous session's 1.1 percent drop, its biggest one-day slide in more than two months, after the Fed kept the size of its asset-buying program at $85 billion a month, confounding expectations for a reduction of roughly $10 billion.
The index has fallen to levels not seen since well before Bernanke first floated the idea of reducing the stimulus in May. The dollar index last stood at 80.238, having fallen to 80.060 on Wednesday, its lowest since February.
The dollar's losses saw the euro hit a 7-1/2-month high of $1.3568, with this year's high of $1.3711 the target for some euro bulls, traders said.
"U.S. yields are lower and it makes sense to move out of dollars into the euro and sterling," said Jeremy Stretch, head of currency strategy at CIBC World Markets In London.
"By the time we have the European Central Bank meeting early next month, we could have the euro at $1.37 which will pose a headache to (ECB President Mario) Draghi."
A stronger euro zone currency would hurt exports and is the last thing the ECB would want, given it has pledged to keep monetary policy accommodative for longer to support a nascent economic recovery.
GROWTH CURRENCIES FARE WELL
The surprise Fed decision saw U.S. Treasury yields tumble while riskier assets like stocks, staged a rally. Near-term implied volatilities also fell, reflecting healthy risk appetite with sharp swings in currencies unlikely.
"Dollar bulls are seen taking a leave of absence until the tapering story reasserts itself," Deutsche Bank analysts said in a note. "In G-10 land, the Fed surprise is likely worth another 2 percent dollar weakness against most pairs, with the notable exception of a more resolute dollar/yen."
Higher-yielding currencies fared well as the tap for cheap dollars remained open. The New Zealand dollar climbed 0.8 percent to a four-month high of $0.8436, getting an added lift after data showed New Zealand's economy grew at a better-than-expected pace in the second quarter.
The rally in riskier assets weighed on the yen. The euro soared to a 3-1/2-year high against the yen of 134.40 while the dollar rose 1.3 percent to 99.22 yen, pulling away from Wednesday's three-week low of 97.75 yen.
The dollar's moves versus the yen were being influenced by two conflicting factors, the drop in U.S. bond yields on the one hand and a bounce in risk appetite on the other.
U.S. data reports had minimal impact on trading.
An increase in U.S. exports narrowed the country's current account deficit in the second quarter to its lowest in four years, the Commerce Department said on Thursday.
A separate report showed the number of Americans filing new claims for jobless benefits rose last week, but it was difficult to get a clear read on the labor market's health because a Labor Department analyst said two states appeared to be working through a backlog of unprocessed claims.