LONDON: The dollar struggled near a seven-month low against a basket of major currencies on Thursday after the Federal Reserve wrong-footed many investors who had positioned for a scaling back in its massive stimulus program. The safe-haven yen fell too, sliding to a 3-1/2 year low against the euro, as the Fed's decision sparked a rally in riskier assets and currencies. The dollar index was down 0.1 per cent, adding to the previous session's 1.2 per cent drop, its biggest one-day slide in more than 2 months, after the Fed maintained its $85 billion monthly asset-buying programme, confounding expectations of a reduction by roughly $10 billion. It has fallen to levels seen well before Fed Chief Ben Bernanke first floated the idea of tapering the stimulus in May. The dollar index last stood at 80.108, after having fallen to 80.060 on Wednesday, its lowest level since February. It fell as rate-sensitive US Treasury yields, with which the index has a strong correlation, slid to 0.32 per cent from a recent two-year high of 0.52 per cent. The dollar's losses saw the euro hit a 7-1/2 month high of $1.3569, with this year's high of $1.3711 the target for some euro bulls, traders said. "US yields are lower and it makes sense to move out of dollars into the euro and sterling," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "By the time we have the European Central Bank meeting early next month, we could have the euro at $1.37 which will pose a headache to (President Mario) Draghi." A stronger currency would hurt exports and is the last thing the ECB would want, given it has pledged to keep monetary policy accommodative for longer to support a nascent economic recovery. GROWTH CURRENCIES FARE WELL Citing tightening financial conditions, Fed Chairman Ben Bernanke refused to commit to begin reducing the bond purchases this year. As well, the central bank cut its growth forecasts for 2013 and 2014, citing strains in the economy from tight fiscal policy and higher mortgage rates. The surprise decision saw US Treasury yields tumble while riskier assets like stocks, stage a rally. Near term implied volatilities also fell, reflecting healthy risk appetite with sharp swings in currencies unlikely. US benchmark 10-year yields dropped to a one-month low of 2.673 per cent on Wednesday, well off highs around 3.01 per cent set earlier in the month. The 10-year Treasury yield last stood at about 2.70 per cent. Higher-yielding currencies fared well as the tap for cheap dollars remained open. The New Zealand dollar climbed 0.8 per cent to a four-month high of $0.8436, getting an added lift after data showed New Zealand's economy grew at a better-than-expected pace in the second quarter. The rally in riskier assets weighed on the safe haven yen. The euro soared to a 3-1/2 year high against the yen of 134.21 while even the Swiss franc jumped a 23-year high. The dollar rose 1 per cent to 98.92 yen, pulling away from Wednesday's three-week low of 97.76 yen. Analysts said the dollar's moves versus the yen were being influenced by two conflicting factors, the drop in US bond yields on the one hand and a bounce in risk appetite on the other. "Going forward it looks like the stock markets will dominate over interest rate differentials and this will help cross/yen and dollar/yen," said Ned Rumpeltin, Head of G-10 FX strategy at Standard Chartered Bank. "We expect Japanese capital outflows to pick up and that should weigh down on the yen. The market will be comfortable with the short-yen positions."

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