FOREX-Dollar slide to two-year low vs euro on Fed outlook


* Euro hits 2-year peak of $1.3825, but may struggle to gainfurther

* Dollar weak on steady Fed policy expectations, lower U.S.yields

* Chinese data briefly boosted Australian dollar

By Wanfeng Zhou

NEW YORK, Oct 24 (Reuters) - The dollar fell to a two-yearlow against the euro on Thursday on expectations the U.S.Federal Reserve will continue its bond purchases well into nextyear.

The euro shrugged off disappointing data showing the pace ofgrowth in euro zone business unexpectedly eased this month. Talkof heavy buying by central banks in Asia also boosted the commoncurrency.

A shutdown of the U.S. government earlier this month andweaker-than-expected September jobs data fueled concerns aboutthe economy. A Reuters poll showed a majority of U.S. primarydealers do not expect the Fed to start cutting stimulus untilMarch of next year.

"Regarding the U.S. dollar, we recently moved to a smallshort position," said Vassilis Dagioglu, head of assetallocation portfolio management at Mellon Capital in SanFrancisco.

"The persistent bullish dollar theme, as a result of aperceived Fed taper that has been present since May, now seemsto have diminished to a degree."

The euro rose 0.2 percent to $1.3803, having hit ashigh as $1.3825, according to Reuters data, its strongest sinceNovember 2011.

Markit's Flash Composite Purchasing Managers' Index (PMI)fell to 51.5 from September's two-year high of 52.2, below allforecasts in a Reuters poll that predicted an uptick to 52.5.

Some analysts said the euro may struggle to make a sustainedbreak above $1.38.

"The disappointing tone of the euro zone data will suggestthat the euro is looking toppy up here, and this should keepeuro/dollar in check," said Jane Foley, senior currencystrategist at Rabobank in London.

Against a basket of currencies, the dollar hit a nearnine-month low of 79.081 and was last down 0.1 percent at79.184.

In the United States, jobless claims fell less than expectedin the latest week to a seasonally adjusted 350,000. The data,however, did not reflect the true picture because Californiacontinued to process a backlog of applications caused bycomputer problems.

A drop in the 10-year U.S. Treasury yield onWednesday to a three-month low further dented the dollar'sappeal.

The dollar slipped 0.1 percent against the yen at 97.28 yen but held above Wednesday's two-week low of 97.13 yen,according to Reuters data.

The Australian dollar got a boost from data showingChinese manufacturing at a seven-month high in October. But itlater surrendered gains and last traded at $0.9614, down 0.1percent.

Analysts said concerns remained about rising money marketrates in China, which may weigh on the Australian currency.China's benchmark seven-day repo rate rose nearly a percentagepoint on Thursday after China's central bank let cash flow outof the money market for a second week.

"Those underlying concerns kept currencies with close tiesto China, like the Aussie and loonie (Canadian dollar), fromparticipating in the broader risk rally," said Joe Manimbo,senior market analyst at Western Union Business Solutions inWashington.

The New Zealand dollar fell 0.5 percent to $0.8347,while the Canadian dollar also slid with the greenback rising0.4 percent to C$1.0423.

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