* Dollar hits five-year high vs yen then slips back
* Markets reassured by Fed message on interest rates
* Australian dollar near 3-1/2-year lows
By Wanfeng Zhou
NEW YORK, Dec 19 (Reuters) - The dollar traded near a five-year high against the yen on Thursday, a day after the Federal Reserve surprised some investors by announcing its long-awaited first cut in its bond-buying program.
The dollar had rallied broadly on Wednesday after the Fed said it would reduce its monthly asset purchases by $10 billion, bringing them down to $75 billion. A reduction in Fed stimulus will help lift U.S. bond yields and buoy the currency.
But in a move to forestall any sharp market reaction that could undercut the recovery, the Fed also said that it "likely will be appropriate" to keep overnight rates near zero "well past the time" that the U.S. jobless rate falls below 6.5 percent - effectively extending the timeline for beginning to raise base interest rates.
"Yesterday's taper announcement by the Fed was no doubt a significant change of course in U.S. monetary policy and should in the long run prove positive for the dollar, assuming U.S. growth remains on track," said Boris Schlossberg, managing director of FX Strategy BK Asset Management in New York.
"However, by maintaining a resolutely dovish bias towards rates and by stressing their concern over disinflation, the Fed muted the impact of their actions on the FX market."
The dollar jumped to a five-year high against the yen of 104.36 yen, according to Reuters data, before retreating to 104.15, down 0.1 percent on the day.
The dollar slipped against the yen after data showed the number of Americans filing new claims for unemployment benefits rose last week to the highest in nearly nine months, casting a shadow on the labor market.
Later in the session, data on existing home sales and Philly Fed business activity will be released.
"While they will not have the same market-moving power as the FOMC yesterday, a positive economic docket will continue to put upward pressure on the U.S. dollar as it reinforces the unwind of" Fed stimulus, said Scott Smith, senior corporate FX trader at Cambridge Mercantile Group in Calgary.
Analysts also said the actual reduction in monthly asset purchases was minimal - $10 billion - and they remain at a staggering $75 billion a month in extra dollars that are coursing through global markets.
The euro hit its lowest in almost two weeks at $1.3648 and last traded at $1.3669, down 0.1 percent.
Losses in the euro should be expected after the European Central Bank's rejection of short-term moves to ease monetary policy and the repayment of loans to the ECB by banks, which has squeezed the volume of available euros.
Data showing the euro zone current account surplus hit a record high in October also helped support the currency.
Implied volatility in euro/dollar options fell sharply on Thursday. One-month implied volatility, a gauge of how sharp a currency move will be, fell to 6.1 percent from as much as 6.8 percent on Wednesday.
This implies the currency will trade within a range in the coming month.
The Australian dollar, already under pressure because of the central bank's desire to see it weaken, hovered near a 3-1/2-year low in the wake of the Fed's announcement.
The Aussie fell as far as $0.8820, its lowest since August 2010, and was last at $0.8840, down 0.2 percent.