Dollar rebounds after steep losses, but outlook bleak

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The dollar recovered on Thursday, a day after incurring sharp losses following the Federal Reserve's shock decision to keep its stimulus program intact, but the currency's prospects remained bleak with U.S. interest rates seen staying low for some time.

Fed Chairman Ben Bernanke, pointing to tightening financial conditions, on Wednesday refused to commit to 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.

By not tapering, the Fed "has arguably removed the single most bullish prop for the U.S. dollar," said Richard Franulovich, senior currency strategist at WestPac in New York.

The safe-haven yen fell on Wednesday 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.

The dollar index was last up 0.2 percent, at 80.376, erasing some of the previous session's 1.1 percent drop, its biggest one-day slide in more than two months. The index has fallen to levels not seen since well before Bernanke first floated the idea of reducing the stimulus in May.

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.

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