The dollar fell sharply on Thursday, hitting a 28-year low versus the Australian dollar, as a Federal Reserve decision to buy more U.S. government debt triggered demand for risk and undermined the U.S. currency.
The market concluded that the Fed's decision to buy $600 billion more in Treasuries by the middle of next year was in line with expectations, spelling more dollar supply that would be likely to weigh it down further.
The Fed's commitment to open-ended purchases of Treasuries, implying low funding costs, brings into focus an expected increased use of the dollar in carry trades, in which the U.S. currency is used to fund purchases in commodities, emerging markets and higher-yielding currencies.
As a result, the dollar slid to a 28-year low against the higher-yielding Australian dollar and plumbed a fresh 10-month trough against the euro.
"The risk now into year-end is that the dollar will go lower, but I don't think the euro can go too much further due to problems that still exist in the euro zone," said Tom Levinson, currency strategist at ING.
Levinson said the $1.43 area could act as a cap for the euro and highlighted this weekend's Greek local elections as a potential banana skin for the single currency.
The euro traded at $1.4237, up around 0.7 percent on the day, having touched a nine-month high at $1.4243. Traders reported an option barrier at $1.4250.
The dollar index, a gauge of its performance against a basket of currencies, fell more than 0.7 percent to an 11-month low of 75.908, taking out trendline support from its March 2008 lows.
Asian share markets rose on Thursday, with European markets following suit to trade up around 1.3 percent. U.S. stocks had closed with slight gains on Wednesday.
The Australian dollar, whose central bank raised rates by 25 basis points to 4.75 percent this week, hit a post-float high above $1.0099, with the New Zealand dollar rallying to its highest since mid-2008 at $0.7896.
The dollar fell 0.2 percent against the yen, easing to 80.90 yen per dollar and still close to its 1995 postwar record low of 79.75 yen. A major Asian sovereign account was a seller in European trade.
For dollar/yen, the key issue would be to see how far the Fed's bond purchases pushed down U.S. yields.
"If they push down U.S. yields in the belly of the curve then it could create downward pressure on the dollar/yen," said Masafumi Yamamoto, chief FX strategist Japan at Barclays.
Yields on medium-term Treasuries fell after the Fed decision on the view they would benefit most from the bond purchase program, while 30-year yields jumped in a sharp curve steepening.
Still, traders remain on alert for possible yen-selling intervention by Japanese authorities to weaken the yen.
The Bank of Japan meets on Nov. 4-5, having brought forward its policy review from mid-November to speed up the launch of a 5 trillion yen ($62 billion) asset buying scheme.
Analysts had said the timing of the meeting gave the BOJ the chance to act quickly if the Fed surprised the market and triggered a new wave of dollar selling.
The European Central Bank, meeting on Thursday, was not expected to show any signs of veering off its crisis exit path, but there was an outside chance of more quantitative easing by the Bank of England.
The Canadian dollar briefly weakened against the dollar after Canada blocked BHP's bid for Potash Corp. but it quickly erased losses to trade at C$1.0034 per dollar, its highest since October 15.
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