NEW YORK (Reuters) - The U.S. dollar extended a sharp sell-off on Thursday, a day after posting its biggest one-day loss against a basket of currencies since at least 1985, as investors digested Federal Reserve plans to buy Treasury debt.
The Fed said on Wednesday it will purchase $300 billion of long-dated Treasuries over the next six months, its first large-scale purchases of government debt since the early 1960s, while also boosting buying of mortgage-backed securities and agency debt in its bid to rescue the economy.
This raised concerns that an expansion of the Fed's balance sheet -- which has already doubled in size in the past six months -- would lead to oversupply of the world's main reserve currency, triggering the sell off.
"Investors were already selling the dollar before the Fed, but the announcement seemed to have given a green light for more euro buying (and dollar selling)," said Marc Chandler, global head of forex strategy at Brown Brothers Harriman in New York. "This correction in euro-dollar seem to be moving toward the $1.40 level. I wouldn't be surprised if we hit that mark soon."
The euro rose to as much as $1.3694, a two-month high, and by mid-morning was up 1.2 percent at $1.3670. The single currency jumped 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.
The dollar index .DXY, a gauge of its performance against a basket of six major currencies, slipped 1.4 percent to 82.994 after a 3 percent slide on Wednesday -- its biggest one-day drop in about of a century, according to Reuters data. It earlier slipped to 82.880, the lowest since early January.
Against the yen, the dollar was 1.5 percent lower at 94.34 yen after falling almost 3 percent on Wednesday.
CRUMBLING DOLLAR
Lackluster U.S. data showing the number of U.S. workers on jobless benefits hitting a record high tempered dollar losses a bit by underscoring the severity of the U.S. economic recession.
Negative data has benefited the dollar in recent months as investors buy the currency as a haven amid a global slowdown, though that dynamic has faded since the Fed's surprise move.
"The data's impact should fade and the dollar should continue to weaken because the markets are still digesting the Fed's decision on buying long-term treasury debt," said Nick Bennebroek, head of FX strategy at Wells Fargo Capital Markets in New York.
ING strategists said the euro would be a major beneficiary of the Fed's 'shock and awe' policy, adding that new dollar supply and debt monetization meant a run-up to the $1.40 area could be on the cards even though the single currency bloc faces severe economic problems.
Daily technical charts show the euro faces resistance around $1.3635. Above that lies the 200-day moving average near $1.3900.
Commodity currencies such as the Australian dollar, Norwegian crown and Canadian dollar also rose on Thursday while many emerging market currencies such as Brazil's real and the Mexican peso gained.
"Emerging market currencies are not homogeneous and should be taken separately," said Chandler at Brown Brothers. "But for now, most seem to be rebounding sharply against the dollar."
(Additional reporting by Gertrude Chavez-Dreyfuss in New York and Kirsten Donovan in London; Editing by Chizu Nomiyama)
