* Dollar index inches up after biggest 1-day slide since 1985
* Fed decision to buy long-term Treasuries weighs on dollar
* Euro touches two-month high of $1.3536 on EBS
* Profit-taking tempers dollar's losses
By Masayuki Kitano
TOKYO, March 19 (Reuters) - The dollar edged up against a
basket of currencies on Thursday, after logging its biggest daily
fall in more than two decades as the U.S. Federal Reserve said it
would buy long-term Treasuries.
The dollar index rose 0.4 percent to 84.553 <.DXY>. But that
came after a 3 percent slide on Wednesday that was its biggest
one-day drop since 1985, and traders said the dollar may resume
its fall.
"I think the dollar will continue to be sold across the board
for the time being, over the next week or so," said Motonari
Ogawa, a director at Barclays Bank in Tokyo.
The Fed stunned markets on Wednesday by announcing it would
buy $300 billion of long-dated Treasuries over the next six
months, its first purchases of government debt since the early
1960s. []
It also said it would expand an existing programme to buy
debt and securities issued by mortgage finance agencies.
The move stirred worries that the sharp expansion of the
Fed's balance sheet would mean more dollars are created, leading
to an over-supply of the world's main reserve currency.
But it also triggered the biggest one-day slide in benchmark
10-year Treasury yields since 1987, a slide in 30-year mortgage
rates toward record lows and a rally on Wall Street, fuelling
some optimism about the outlook for the U.S. economy and
financial markets in general.
"USD was taken to the woodshed and beaten like a dog. And
after a short rest, beaten like a dog again. Market sentiment on
the Fed's manoeuvre was crystal clear," David Watt, senior
currency strategist at RBC Capital Markets in Toronto said in a
research note.
The euro initially extended its gains on Thursday after
jumping 3.8 percent on Wednesday for its biggest one-day rise
since its launch in 1999, according to Reuters data.
The euro hit a two-month high of $1.3536 on trading platform
EBS, but it later gave up its gains and fell 0.4 percent from
late U.S. trading on Wednesday to $1.3420 <EUR=>.
In the near-term, the euro may have more room to rise against
the dollar, market players said.
FURTHER DOLLAR WEAKNESS?
The euro could heads toward $1.4000, helped by its yield
advantage over the dollar, Barclays' Ogawa said.
On Ichimoku charts, the euro broke above the bottom of the
cloud -- a key resistance line -- on Wednesday and now faces
resistance at $1.3635, which is where the top of the cloud now
lies. Above that lies the 200-day moving average near $1.3900.
The Fed's actions may turn out to be positive for the dollar
if viewed over the next six months to a year, said Tokichi Ito,
deputy general manager for Trust & Custody Services Bank's forex
team.
"It would be good if there was some kind of perfect medicine
that could be prescribed that has no side effects, but there
probably isn't any," Ito said.
"The measures are aimed at helping to stabilise financial
markets and improving the economy over the medium- to longer
term, and if that is viewed positively or the situation improves,
that could bolster the dollar's credibility," he said.
The Fed is not alone in buying government debt.
The Bank of England is buying 75 billion sterling of gilts
and the Bank of Japan on Wednesday announced it would increase
its purchases of Japanese government debt. []
[]
In addition, the European Central Bank may also eventually
turn to non-standard policy measures after cutting interest rates
to a record low 1.5 percent in March. []
The euro could come under pressure if that happens, said
Trust & Custody Services Bank's Ito.
With many major economies' interest rates close to zero,
central banks around the world are considering unconventional
measures such as quantitative easing, in which the banking system
is flooded with money to promote lending, usually by buying large
amounts of assets from banks.
The dollar dipped 0.2 percent to 96.00 yen <JPY=>. The euro
fell 0.7 percent to 128.88 yen <EURJPY=R> after touching a
three-month high of 130.32 yen earlier on Thursday.
Some traders said the yen was supported by the selling of
dollars and euros against the yen by Japanese life insurers.
(Additional reporting by Wayne Cole in SYDNEY and Shinji
Kitamura in TOKYO; Editing by Hugh Lawson)
