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Thursday November 4, 2010 - 20:25:04 GMT
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FOREX NEWS - US dollar drops as investors seek higher returns

3:17pm EDT

* Riskier assets in demand; Wall Street shares up

* Euro at 9-1/2 mth high, but euro zone woes to slow gains

* BoE, ECB keep rates unchanged; US jobs data looms (Adds comment, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Nov 4 (Reuters) - The U.S. dollar fell to a 28-year low against the Australian currency on Thursday and over a nine-month trough versus the euro after Federal Reserve plans to buy more Treasuries pushed U.S. yields lower and prompted investors to seek returns elsewhere.

The Fed's commitment on Wednesday to open-ended purchases of Treasuries, implying low funding costs, brings into focus an expected increased use of the dollar in carry trades. In such trades, the greenback is used to fund purchases in commodities, emerging markets and higher-yielding currencies.

"My expectation is as soon as the Fed starts pushing that button and printing money, that money immediately leaves the U.S. because there are a lot of more compelling investments overseas than there are in the U.S. right now," said Ihab Salib, senior portfolio manager and head of international fixed income at Federated Investors in Pittsburgh, Pennsylvania.

"My expectation is for a steady trend of a weaker dollar," Salib said, adding he expects the dollar to decline more versus currencies of emerging markets and peripheral markets such as Australia, Canada and Norway than versus the yen or euro.

Federated Investors manages $341 billion in assets.

The euro EUR=EBS was last at $1.4216, up 0.5 percent on the day, having touched a 9-1/2-month high at $1.4283, according to EBS data. Traders reported that an option barrier at $1.4250 was taken out. There are more barriers at $1.43.

Bids on the euro are also expected around $1.4200-$1.4220.

Technical strategists also flagged the $1.4370 area, the 78.4 retracement of the move from the November high of $1.5140 to the June $1.1875 slide. The next target is around $1.4580, the euro's January high.

"The Fed in my view is trying to debase the dollar because printing all that money is not going to spur growth on its own," said Axel Merk, president and portfolio manager at Merk Investments in Palo Alto, California. Merk runs the company's $500 million currency mutual fund.

Investors awaited a key U.S. jobs report and the outcome of policy meeting by the Bank of Japan, both due out on Friday.

EURO AT $1.50?

In contrast to the Fed, the Bank of England on Thursday said it made no changes to its asset purchasing plan. Analysts had expected the BoE to follow the Fed.

The European Central Bank, meanwhile, kept interest rates unchanged at 1 percent. ECB President Jean-Claude Trichet said Fed policy actions do not suggest the United States was actively seeking a weaker dollar. [ID:nLDE6A3217]

Some market participants are forecasting the euro will hit $1.50 in short order. Others are skeptical given renewed worries about the euro zone's sovereign debt woes.

Salib said he wouldn't be surprised to see the euro at $1.45 to $1.50 by the end of year. But "I don't see it going much beyond that just because what's happening domestically within Europe," he said.

Christian Broda, managing director at the $12 billion hedge fund Duquesne Capital Management noted "$1.50 is not what it used to be in 2006-2007" in real exchange rate terms. He said a euro at $1.50 would be the equivalent of $1.35 in 2007 terms.

"The euro is in a secular trend which is an appreciation ... Asia is a positive force for the euro's appreciation. It is in a stage of development that needs a lot of capital goods," Broda said, adding Germany -- the biggest euro zone member -- is a beneficiary of Asia's need for capital goods.

The dollar index .DXY, a gauge of its performance against a basket of six currencies, fell to an 11-month low at 75.631, taking out trendline support from its March 2008 lows.

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Link to PDF on Fed decision: r.reuters.com/cyh73q

For more stories on Fed policy: [FED/AHEAD]

Graphic on assets and QE r.reuters.com/kyw48p

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The Australian dollar, whose central bank raised rates this week, hit a post-float high at US$1.0158 AUD=D4. It was last at US$1.0152, up 1 percent. The New Zealand dollar rallied to its highest since mid-2008 at US$0.7976 NZD=D4, and was last up 2.1 percent at US$0.7954.

Currency volatility, a gauge of market sentiment, fell in a variety of currencies including the Australian and New Zealand dollars on Thursday. Lower volatility tends to improve risk appetite and are usually a go-signal to increase carry trades.

Against the yen, the dollar eased to 80.63 yen JPY=, close to its 1995 postwar record low of 79.75. Traders remained on alert for yen-selling intervention by Japanese authorities. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Andrew Hay)

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