FOREX-US dollar at 14-month low vs euro as Fed policy unchanged

Thu Jan 31, 2013 3:40am IST

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* Euro rises above resistance at $1.35

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

* Yen slides to 2-1/2-year low vs dollar, more losses seen

By Daniel Bases

NEW YORK, Jan 30 (Reuters) - The U.S. dollar slid to a 14-month low against the euro on Wednesday after the U.S. Federal Reserve maintained its $85 billion-a-month bond-buying program to spur economic growth.

The Fed repeated its pledge to buy securities until the outlook for employment "improves substantially." It also held interest rates near zero.

"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 government reported the economy contracted by a 0.1 percent annual rate in the fourth quarter, though the Fed said the unexpected downturn was likely temporary.

The euro spiked to $1.3567, a gain of roughly 0.56 percent, and the highest level since November 2011, according to Reuters data. The euro zone currency had already strengthened against the U.S. GDP data.

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. A European Central Bank policymaker, Ewald Nowotny, said the recovery was seeping into the real economy.

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 government's closely watched monthly report on the labor market.

Against the yen, the dollar rose 0.40 percent to trade at 91.09 yen. 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 Bank of Japan 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.

The euro rose 0.94 percent against the yen to trade at 123.56.

The greenback fell 1.11 percent to 0.9109 Swiss francs , just off a four-week low hit early during New York hours.

In other central bank monetary policy decisions, the Reserve Bank of New Zealand left its benchmark Official Cash Rate unchanged, as expected, at a record low 2.5 percent. The bank said inflation remains tame due to an overvalued New Zealand dollar.

The greenback lost 0.42 percent against the kiwi to trade at US$0.8356.

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