FOREX-Dollar clings near 2-week high as Fed dodges ultra-doves

October 31, 2013

* Dollar index hovers near two-week highs

* Market unwinds USD shorts after no surprises from Fed

* Fed keeps stimulus in place as expected, not too alarmed on growth

* Kiwi off 6-week low, RBNZ reiterates view for higher rates

* BOJ keeps policy steady as expected

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Oct 31 (Reuters) - The dollar hovered near a two-week high against a basket of major currencies on Thursday, after extending gains when the Federal Reserve mollified jumpy markets and kept its massive bond-buying stimulus in place.

Some investors had been taking profits on very bearish dollar positions leading up to the Oct 29-30 policy meeting. They continued to do so after the Fed's comments suggested it was less alarmed over the state of the economy than some had anticipated.

The greenback could see more short-covering in coming weeks, especially in the wake of its recent decline, said Daisuke Karakama, market economist for Mizuho Bank in Tokyo.

"It is said that the year-end period, especially after mid-November, is when position-squaring tends to take place particularly among hedge funds and speculators," Karakama said.

Given that the dollar index has only just started to bounce from a low level, there could be more dollar buying toward the year-end as investors close out their bets, he added.

The dollar index edged up 0.1 percent to 79.817 , clinging near Wednesday's post-Fed peak of 79.905, its highest level since Oct. 17.

The dollar index has bounced from a nine-month low of 78.998 set last Friday, but is down 0.5 percent for the month.

The euro slipped 0.2 percent to about $1.3710, nearing support at about $1.3695, a level representing the 38.2 percent retracement of its Oct 16-25 rally. Traders said a break there could extend the euro's fall to support at $1.3645/55.

The BOJ will issue a semi-annual report on the economy and prices, which will include fresh long-term growth prospects, at 0600 GMT, followed by a news conference by Governor Haruhiko Kuroda at 0630 GMT.

"I think basically they (BOJ) would say that they are comfortable with the outlook," said Sim Moh Siong, FX strategist for Bank of Singapore.

"But I think the bigger question is, will they still have the same level of comfort three to six months down the road. Perhaps then there may be a higher possibility of easing if the sales tax hike does impact on the economy," Sim added.

Japan's sales tax is set to rise to 8 percent in April from 5 percent, to cover rising welfare costs.

The Australian dollar bounced after surprisingly strong housing data showed record-low interest rates were helping the economy gain traction, lessening the need for further easing.

The Aussie dollar rose 0.1 percent on the day to $0.9490 , having risen to $0.9509 earlier.

The New Zealand dollar eased 0.2 percent to $0.8255 , but stayed above Wednesday's six-week low of $0.8193 after the Reserve Bank of New Zealand reiterated it was likely to hike interest rates next year.

Traders said some investors were forced to cover short kiwi positions as they had expected the RBNZ to take a more dovish to tone to restrain the local dollar.