FOREX-Dollar hovers near seven-month low on Fed announcement
* 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 remained near a seven-month low against a basket of major currencies on Thursday after the Federal Reserve left its stimulus program unchanged, surprising investors who had positioned for a scaling back in its stimulus.
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 up 0.1 percent erasing some of 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 80.327, 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. The euro was last up 0.1 percent at $1.3530.
"The data the Fed has been watching - especially since June - has not shown signs of improvement," said Christopher Vecchio, currency analyst at DailyFX in New York.
After the Fed shock, Vecchio sees December as the more likely month for tapering to begin.
"But that, of course, will be contingent on inflation moving higher and jobs growth accelerating," said Vecchio. "Above all, the key takeaway is that it will only take one or two strong, important data (retail sales, non-farm payrolls) to revive taper speculation; and then the U.S. dollar can recover more broadly."
GROWTH CURRENCIES FARE WELL
But for now, 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.
Higher-yielding currencies fared well as the tap for cheap dollars remained open. The New Zealand dollar climbed to a four-month high, 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 134.94 while the dollar rose 1.5 percent to 99.42 yen, pulling away from Wednesday's three-week low of 97.75 yen. The dollar/yen peak of 99.58 yen was the highest in four trading sessions.
The dollar's moves versus the yen were being influenced by two conflicting factors, the drop in U.S. bond yields and a bounce in risk appetite.