May 3, 2018 / 7:43 AM / a year ago

FOREX-Euro bounces off 4-month low, dollar bulls pause after Fed meeting

* Euro rises back towards $1.20

* Dollar slips slightly after Fed policy decision

* Commodity-linked currencies recover

* Graphic: World FX rates in 2018

By Tommy Wilkes

LONDON, May 3 (Reuters) - The euro rose off four-month lows on Thursday as the dollar’s recent rally came to a halt after the Federal Reserve did little to alter market expectations for further interest rate rises this year.

Expectations of faster-than-expected rate rises in the U.S., as well as a rapid covering of positions by investors short on the dollar, has sent the greenback to its strongest level since mid-January.

But the Fed left its benchmark overnight lending rate in a target range of between 1.50 percent and 1.75 percent as had been widely expected on Wednesday.

Analysts interpreted its comments on inflation as a signal the Fed may allow prices rises beyond its target, a stance that would limit the need for the central bank to embark on a more aggressive path of monetary tightening in response to recent rises in inflation.

On Thursday the dollar index, measured against a basket of currencies, was flat was the euro rose 0.3 percent to $1.1983, off the low of $1.1938 it fell to on Wednesday.

“In the end it was not a major surprise for the market that the Fed left the key rate unchanged at the meeting without a press conference but made positive comments on the outlook and further rate hikes,” Commerzbank analysts said in a note.

“The market will have to get used to the fact that in order to prevent an economic overheating interest rates in the U.S. will continue to rise,” they said, predicting that rate differentials between countries would have an increased bearing on currencies and could cement euro/dollar at around $1.20.

With the Fed’s meeting out of the way, focus is shifting to U.S. jobs data due on Friday for further indications of the strength of the economy and inflation pressures.

A near-term focus for the common currency is euro zone inflation data due later on Thursday, said Mitul Kotecha, senior EM strategist for TD Securities in Singapore.

The euro could come under pressure if the data shows a slowdown in core inflation in the euro zone, Kotecha said, adding that the dollar could see further gains, at least in the near term.

The dollar has been buoyed in recent weeks by the strong U.S. economic outlook and rising Treasury yields amid signs of a relative slowdown in some other developed economies, such as those in Europe.

The dollar eased 0.1 percent to 109.68 yen, inching away from a three-month peak of 110.05 yen set on Wednesday.

Elsewhere, Norway’s central bank gives its policy decision at 0800 BST, with any sign of hawkishness from the central bank set to push the crown higher. The crown has benefited from rising oil prices this year.

Commodity-linked currencies like the Canadian and Australian dollars gained sharply, with the latter rising 0.4 percent to $0.7523 cents after data showing a better-than-expected jump in the country’s trade surplus for March.

The Aussie dropped to as week as $0.7473 earlier this week to hit its lowest since mid-2017. (Additional reporting by Masayuki Kitano in SINGAPORE Editing by Raissa Kasolowsky)

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