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

Reuters

* 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 alarmedon 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 neara two-week high against a basket of major currencies onThursday, after extending gains when the Federal Reservemollified jumpy markets and kept its massive bond-buyingstimulus in place.

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

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

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

Given that the dollar index has only just started to bouncefrom a low level, there could be more dollar buying toward theyear-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, itshighest level since Oct. 17.

The dollar index has bounced from a nine-month low of 78.998set 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 38.2percent retracement of its Oct 16-25 rally. Traders said a breakthere could extend the euro's fall to support at $1.3645/55.

The BOJ will issue a semi-annual report on the economy andprices, which will include fresh long-term growth prospects, at0600 GMT, followed by a news conference by Governor HaruhikoKuroda at 0630 GMT.

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

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

Japan's sales tax is set to rise to 8 percent in April from5 percent, to cover rising welfare costs.

The Australian dollar bounced after surprisingly stronghousing data showed record-low interest rates were helping theeconomy 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 $0.8193after the Reserve Bank of New Zealand reiterated it was likelyto hike interest rates next year.

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

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