* Dollar index hovers near two-week highs
* Market unwinds dollar shorts after Fed announcement
* Fed keeps stimulus in place, not too alarmed on growth
By Jessica Mortimer
LONDON, Oct 31 (Reuters) - The dollar hovered near atwo-week high on Thursday as some investors cut negative bets onthe currency after the U.S. Federal Reserve kept its stimulusprogramme in place and its options for tapering its bond buyingopen.
In Wednesday's statement the U.S. central bank dropped aphrase expressing concern about a run-up in borrowing costs andmade no direct reference to the partial government shutdownearlier this month.
The dollar index traded steady on the day at 79.759 but near a peak of 79.905 hit after the Fed announcement late onWednesday, its strongest since Oct. 17. It has recovered from anine-month low of 78.998 hit on Friday.
The euro lost 0.15 percent to $1.3713, pulling awayfrom last week's peak of $1.3833. The euro stayed above chartsupport at $1.3651, the Oct. 21 low.
"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.
He still expected the Fed would not start scaling backmonetary easing until March next year. This meant dollar gainswould be limited, keeping the euro comfortably above $1.36.
Rasmussen saw scope for the euro to rise again in the shortterm, but said a breach of $1.40 was unlikely given some recentweaker euro zone data and concerns about the possibility of moremonetary easing measures from the European Central Bank.
The single currency dipped after ECB governing councilmember Ewald Nowotny said earlier the central bank would providemore liquidity when cheap long-term loans it made in late 2011and early 2012 expire.
Daisuke Karakama, market economist for Mizuho Bank in Tokyo,said the dollar could see more short covering in coming weeks.
"It is said that the year-end period, especially aftermid-November, is when position-squaring tends to take placeparticularly among hedge funds and speculators."
The dollar fell 0.2 percent against the yen, however, to98.26 yen, with weaker equity markets helping thesafe-haven Japanese currency.
Bank of Japan Governor Haruhiko Kuroda on Thursday saidJapan's economy was expected to grow above its potential andsteadily follow a path towards the goal of 2 percent inflation.
However, three BOJ board members dissented against thelatest semi-annual report, with some citing stronger downsiderisks to the economy.
The Australian dollar was up 0.25 percent at $0.9502 after surprisingly strong housing data suggested theremay be less need for further monetary easing.
The New Zealand dollar was steady at $0.8262 afterthe Reserve Bank of New Zealand reiterated it was likely to hikeinterest rates next year.
- Budget, Tax & Economy