* Fed unveils Operation Twist, stops short of QE * Euro/yen hits 10-yr low as risk appetite sours post-Fed * Aussie falls below parity vs dollar By Anirban Nag LONDON, Sept 22 (Reuters) - The dollar surged to a seven-month high against a basket of currencies on Thursday after the Federal Reserve flagged significant downside risks for the economy but stopped short of bold monetary easing, leading to a huge sell off in higher-yielding currencies. Analysts questioned whether the move the Fed did make -- shifting its portfolio toward longer-term debt -- would bolster the economy and unwound leveraged positions funded in dollars in response. The low-yielding dollar and Japan's yen are usually sought during times of financial stress and pessimism about global growth. The euro hit seven-month lows while the Australian dollar , a proxy for global growth, fell below parity against the U.S. dollar for the first time since early August, hitting a six-month trough. "Its all risk off. The markets have not taken what the Fed had to say about the economy very well," said Neil Mellor, currency strategist at Bank of New York Mellon. "The break below the $1.35 level for the euro/dollar could see it settle in a new $1.30-1.35 range in coming months." European stock markets were also in the red as were currencies of emerging economies like the Brazilian real and the South African rand which made their biggest daily losses since the global financial crisis in 2008. The Fed unveiled a programme, dubbed "Operation Twist", putting more downward pressure on long-term interest rates in a bid to help the ailing housing sector, but few think it will be enough to seriously bolster growth. Additional factors seen supporting the dollar were slightly higher short-term rates and the Fed's decision not to increase money supply. The dollar index , the gauge of its performance against a basket of currencies, jumped to 78.439, its highest since late February. It was last up 1.25 percent at 78.317. The euro was down 0.7 percent at $1.3473 , having fallen to as low as $1.3447--its lowest since mid-February. It fell past stops below $1.35, taking another hit from a European Central Bank study, coauthored by Executive Board member Juergen Start, which said the whole common currency project was in danger due to fiscal imbalances. . Support for the euro is seen at around $1.3400, the 50 percent retracement of the euro's move from a low of $1.1875 in early June, 2010 to a high of above $1.49 in early May 2011. According to Societe Generale Cross Asset Research, hedge funds have initiated their biggest net short positions against the euro since June 2010. While current positioning was below peaks reached in June last year, it lent strong support to the U.S. dollar especially against the euro, it said. The euro fell to a 10-year low against the yen of 102.615 yen on trading platform EBS. EUROPE BACK IN FOCUS The dollar was steady against the yen at 76.46 . It had hit a session high of 76.97 on stop-loss buying by model funds. But its gains stopped above Wednesday's peak of 76.86 yen and resistance on daily Ichimoku charts in the 76.85 to 76.90 area. The yen was hovering near record highs, keeping alive the risk of intervention by Tokyo authorities. The Japanese currency is likely to see upward pressure in an environment where investors shun risk due to worries about a global slowdown and a possible default in the euro zone. On Wednesday, Greece outlined key measures to help alleviate the country's fiscal problems and to try and secure a bailout payment crucial to avoid running out of money next month. The steps came as the International Monetary Fund warned that Europe's sovereign debt crisis risks tearing a giant hole in banks' capital. Adding to the gloom, flash manufacturing PMI data showed the pace of business activity in the euro zone's two biggest economies Germany and France slowing. . Globally, PMI indices have been providing warning signals of a slowdown and the latest surveys hit risk appetite further. "As a result, we expect the pro-cyclical and commodity currencies to be increasingly at risk, while we expect the dollar to continue its move back into favour," said Ian Stannard, currency analyst at Morgan Stanley. Against the Swiss franc, the dollar rose to its highest in more than five-months at 0.9145 francs after jumping 1.5 percent overnight. It was also weak against the euro, pushed down on talk that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20. The SNB declined to comment. The Aussie fell below parity with the U.S. currency and last traded 1.5 percent lower at $0.9891 -- its lowest in six months. The dollar also jumped against the Canadian dollar, rising to a nine-month high of C$1.0182. (Editing by Anna Willard)

Source