FOREX-Dollar holds gains after Fed steers clear of ultra-doves, BOJ next


* Dollar index near two-week highs

* Market continues to unwind USD shorts after no surprisesfrom Fed

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

* Kiwi dollar gets boost after RBNZ reiterates outlook forhigher rates

* BOJ policy decision next in focus

By Ian Chua

SYDNEY, Oct 31 (Reuters) - The dollar hovered near atwo-week high against a basket of major currencies early in Asiaon Thursday, having extended gains after the Federal Reservekept its massive bond-buying stimulus in place in a widelyexpected decision.

Investors had been taking profits on very bearish dollarpositions in the days leading up to the Oct 29-30 policy meetingand continued to do so after the Fed did not sound quite asalarmed about the state of the economy as some had anticipated.

The U.S. central bank said it would keep buying $85 billionin assets per month and sounded only slightly less optimisticabout growth. However, it dropped a phrase expressing concernabout a run-up in borrowing costs, suggesting greater comfortwith the current level of interest rates.

"The USD's ability to rally simply on lack of new negativenews from the Fed adds more evidence to suggest that the markethas become uncomfortably short USD," analysts at BNP Paribaswrote in a client note.

The dollar index last stood at 79.781 , havingpeaked at 79.905, a high not seen since Oct 17, pulling furtheraway from a 9-month trough of 78.998 plumbed Friday.

Against the yen, the dollar bought 98.53, not farfrom a two-week peak of 98.69 set overnight, while the eurotraded at 135.24 after extending to a 1-1/2 week highof 135.45.

The euro slipped to $1.3721 from Wednesday's high of$1.3787, and briefly tested chart support around $1.3695, alevel representing the 38.2 percent retracement of its Oct 16-25rally. Traders said a break there could extend the euro's fallto major and pivotal support at $1.3645/55.

With the Fed meeting out of the way, traders expect themarket to go back to watching U.S. economic data before decidingon whether to continue unwinding short dollar positions.

The weekly U.S. jobless claims and the Chicago PMI businessbarometer report are due later in the day.

In Asia, the outcome of the Bank of Japan policy meetingwill be in focus, although the BOJ is expected to maintain itsultra-loose monetary policy. It could also lift its long-termeconomic forecasts.

Another standout performer was the New Zealand dollar, whichstaged a dramatic turnaround from a six-week trough and pulledinto positive territory after the Reserve Bank of New Zealandreiterated its outlook for interest rate hikes next year.

The kiwi dollar traded at $0.8244, having bouncedoff a six-week low of $0.8193.

Traders said some investors were also forced to cover shortkiwi positions as they had expected the RBNZ to sound moredovish to temper a buoyant local dollar.

But all the RBNZ said was that a strong currency would giveit flexibility on when to hike rates and by howmuch.

"There was quite a lot of anticipation that the statementwould be softer ... it appears that the market was overlyanticipating a dovish statement," said Nick Tuffley, chiefeconomist at ASB Bank.

"But there's no reference to the dollar being overvalued,there's no suggestion of intervention coming, it's more of areference to the obvious monetary policy response to a highexchange rate."

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