NEW YORK (Reuters) - The dollar fell against the euro and yen on Thursday, still reeling from a less-bullish outlook on the U.S. economy by the Federal Reserve the previous session.
The euro's rise, however, was partly limited by steep losses in the U.S. stock market, with the currency remaining highly correlated with the S&P 500 index at a solid 63 percent.
Earlier euro gains against the dollar were mostly due to buying from real money, or long-term investors, who have been extremely short the single currency for some time, traders said.
The Fed's less-upbeat view on the U.S. economy gave these investors an excuse to unwind some of their short positions in the euro.
"The dollar has been well-offered for most of the session and that's mostly on the back of the Fed's concerns about U.S. growth," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York.
Worries over Greece still hung over the euro zone as the cost of protecting its government debt against default hit a record high. Traders said this should cap the euro's gains.
But they added that levels above $1.2350 should keep bids on the euro and if it goes above $1.2380-90, that could trigger stops from $1.2400 and beyond.
In late afternoon trading, the euro rose 0.1 percent to $1.2325 against the dollar, having risen as high as $1.2388, according to electronic trading platform EBS.
If the euro can continue to trade higher, the next resistance lurks between $1.2405 and $1.2415, said Dan Cook, senior market analyst at IG Markets in Chicago. "A break beyond this zone though and a retest of this month's high at 1.2467 would seem likely."
Near-term support in the euro, meanwhile, may be found between $1.2245 and $1.2265.
The euro was down 0.3 percent versus the yen at 110.32 yen, while the dollar fell 0.4 percent to 89.47 yen after earlier hitting a one-month low at 89.22.
U.S. economic reports on weekly initial jobless claims and durable goods orders for May came in largely in line with expectations, causing the dollar to extend declines against the yen.
The U.S. dollar had already been under pressure in Asian trading as investors initially took the view the Fed's renewed pledge to keep rates on hold for an extended period would be a positive for the world economy, briefly boosting risky assets like commodity-linked currencies such as the Australian dollar.
European investors chose to focus on the Fed's scaling back of its assessment of the pace of recovery, leading them buy the yen and sell the dollar.
Sterling rose to a 19-month high versus the euro. British assets were still being bolstered by Tuesday's tough budget, which investors perceive as necessary to tackle a huge deficit as fiscal worries plague the euro zone. The pound last traded at $1.4922, down 0.3 percent on the day.
The Aussie dollar reversed gains after rising as high as US$0.8771 as Australia's ruling Labor Party elected Julia Gillard as the new prime minister.
Gillard immediately offered to end a bitter dispute over a controversial "super profits" mining tax, saying she would throw open the door for fresh negotiations. But she stressed miners should pay more taxes.
In late trading, the Aussie fell 0.9 percent to US$0.8661.
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