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Dollar firm post-Fed, franc eyed for intervention

Foreign exchange currencies.
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Foreign exchange currencies.

The U.S. dollar inched higher against the yen and was steady to the euro on Thursday after a Federal Reserve statement which, with some caveats, was read as keeping the bank on track to raise interest rates later this year.

There were hints from the Fed of concern about both the headwinds facing other major economies and an undershoot in inflation that might stay its hand somewhat longer than the mid-2015 timeline previously forecast by many.

That prodded U.S. bond yields lower, but the overall picture, of a steadily improving U.S. economy while Europe and Japan remain mired in crisis, was left firmly intact.

"For us, its the growth and yield differentials that are most important,'' said Ian Stannard, head of European FX strategy with Morgan Stanley in London.

"By underlining 'international developments' the Fed is highlighting that process and the attraction of the U.S. as an investment destination. That all plays in to dollar strength.''

The dollar gained 0.2 percent against the yen to 117.775 yen and was roughly unchanged against the euro at $1.1290. The New Zealand dollar, which tumbled to a 4-year low of $0.7297 overnight after the Reserve Bank of New Zealand opened the door to a possible cut in rates, recovered a foothold in early trading in Europe, down less than 0.1 percent.

Just a month ago, the bank was flagging that further tightening was needed.

"For the NZ dollar, a further repricing of RBNZ rate expectations will imply a period of under performance against the G10 crosses, especially given that a number of markets have already undergone a significant repricing of policy expectations in recent months,'' JPMorgan analyst Sally Auld said.

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The kiwi last traded at $0.7313. Against the yen, it last traded at 86.10 yen, up from a three-month low of 85.87 yen set earlier on Thursday.

The other big mover in Europe was again the Swiss franc, which has weakened this week on the back of expectations of more intervention from the Swiss National Bank against the currency.

The dust is still settling on the SNB's freeing up of the currency, which prompted a 25 percent rise in the franc's value two weeks ago.

Morgan Stanley's Stannard said he believed the Swiss were moving to a ``dirty float'' where they will intervene in favor of a basket of currencies, including the dollar, euro and others.

He forecasts the franc to weaken to 1.02 francs per dollar by the end of the year and the euro to 1.07, compared to 0.9091 and 1.0272 respectively on Thursday.