FOREX-U.S. dollar at 14-month low vs euro, Fed keeps easy policy

Thu Jan 31, 2013 1:47am IST

* Euro rises above resistance at $1.35, highest since Nov. 2011

* U.S. economy unexpectedly contracts in 4th quarter

* Fed maintains near zero interest rates, continues asset purchases

* Yen slides to 2-1/2-year low vs U.S. dollar, more losses in store

By Daniel Bases

NEW YORK, Jan 30 (Reuters) - The U.S. dollar slid to a fresh 14-month low against the euro on Wednesday after the U.S. Federal Reserve kept interest rates near zero and maintained its bond-buying program to spur economic growth.

The Fed's decision to maintain its $85 billion a month bond-buying program is geared toward boosting the economy and is not likely to stop until the outlook for unemployment improves substantially.

Loose monetary policy gives investors less incentive to buy and hold U.S. dollars, thereby contributing to its weakness.

"This was broadly in line with expectations," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

"So the mood of the market has not changed much at all. And certainly after the U.S. data this morning, particularly the GDP report, we can expect the Fed to continue with their very accommodative monetary policy, and that's negative for the dollar," he said.

The euro spiked to a fresh high of $1.3587, a gain of roughly 0.70 percent, according to Reuters data. The euro zone currency was already stronger against the greenback after the U.S. Commerce Department earlier reported an unexpected 0.1 percent contraction in U.S. fourth quarter economic activity,

The weakness in the U.S. economy, while likely short-lived, say economists, contrasted against an improving economic outlook in the euro zone. It was the first time the U.S. economy shrank since the 2007-09 recession.

The euro broke above key resistance at $1.35 and traders said the rally has further to go after recent positive news on the German economy and Europe's banks.

Further upside targets for the euro are at $1.3640, the high in mid-November, 2011, and $1.3833-35, the 61.8 percent retracement of the move down from May 2011 to July 2012, which also coincides with the July 2011 low.

Euro zone data showed the region's economic sentiment rose for the third month in a row, while European Central Bank policymaker Ewald Nowotny said the recovery was seeping into the real economy.

The dollar traded at 91.19 yen, a rise of 0.51 percent on the day. It earlier touched a 2-1/2-year high at 91.40 yen according to Reuters data. Traders reported an option barrier at 91.50 yen, which could cap gains in the near term.

Selling the yen has been mostly a one-way bet since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the BOJ into more aggressive monetary easing to beat deflation.

"We have a forecast of 95 yen for this quarter but even that could be exceeded given the pace of the current moves," said Ian Stannard, head of European FX strategy at Morgan Stanley.

A separate report Wednesday showed U.S. private employers added 192,000 jobs in January, more than economists were expecting, in a sign of growth in the labor market. The data comes two days ahead of the all-important government nonfarm payrolls report.

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