* Dollar index hits two-week high
* Euro zone inflation at four-year low, unemployment high
* Market unwinds dollar shorts after Fed announcement
* US jobless claims drop in latest week
By Julie Haviv
NEW YORK, Oct 31 (Reuters) - The dollar on Thursday rose fora fifth straight session against a basket of major worldcurrencies to hit a two-week high, buoyed by the FederalReserve's latest outlook which was perceived as less dovish thanexpected.
The euro tumbled to a two-week low against the greenbackafter a fall in inflation to its lowest in nearly four yearsraised speculation the European Central Bank will further easemonetary policy.
The dollar index, which measures the greenback against sixcurrencies but is dominated by the euro, reached 80.080,its highest since Oct. 17, pulling further away from anine-month low of 78.998 hit on Friday. It last traded up 0.3percent at 80.024.
Short dollar positions, bets that profit when the dollardrops, taken in recent weeks were unwound after the Fed droppeda phrase in its statement on Wednesday expressing concern abouta run-up in borrowing costs and made no direct reference to thepartial government shutdown earlier this month.
The Fed also maintained its $85 billion per month of bondpurchases, intended to prop up the economy.
"In this environment markets are nervous," said CamillaSutton, chief currency strategist at Scotiabank.
"We would caution dollar bears as some (news) articles aresuggesting that a December taper is a real possibility, so thereis some added upside risk to the dollar, particularly since themarket is now positioned for a first half 2014 taper," she said.
Sutton said month-end rebalancing flows should not play asignificant role on Thursday, noting a minimal need for equityportfolio managers to rebalance.
The dollar held steady after data showed the number ofAmericans filing new claims for unemployment benefits declinedlargely as expected last week as the impact of a Californiacomputer glitch worked its way out of the report.
"The market was expecting a relatively dovish outcome fromthe Fed and that's why we've seen some profit-taking. People hadbecome too bearish on the dollar and too bullish oneuro/dollar," said Arne Lohmann Rasmussen, head of foreignexchange research at Danske Bank.
Meanwhile, the euro fell for a fourth straight sessionversus the dollar, hitting a trough of $1.3631, its lowest sinceOct. 17. It last traded at $1.3634, down 0.7 percent.
Euro zone flash annual HICP inflation fell to just 0.7percent in October. This may raise concerns among euro zonepolicymakers about deflation risks and damage to the economyfrom a strong currency. Euro zone unemployment was steady at arecord high of 12.2 percent in September.
ECB governing council member Ewald Nowotny said earlier onThursday the central bank would provide more liquidity whencheap long-term loans it made in late 2011 and early 2012expire.
"We have had a nasty combination of a lack of inflationarypressures and record unemployment, and the market'sinterpretation is that the ECB may sit up and take notice," saidJeremy Stretch, head of currency strategy at CIBC.
"The downside risks for euro/dollar look evident and $1.36is a near-term target."
The dollar fell 0.2 percent to 98.26 yen. Weakerequity markets helped the safe-haven Japanese currency even asthree Bank of Japan board members dissented against the latestsemi-annual report, with some citing stronger downside risks tothe economy.
The Australian and New Zealand dollars also gained against their U.S. counterpart on strong Australianhousing data and after the Reserve Bank of New Zealandreiterated it was likely to hike interest rates next year.