* Dlr extends drop after biggest 1-day slide since 1985
* Fed to buy govt debt, flooding markets with dollars
* US weekly jobless data tempers dollar's losses
* Emerging markets currency, high yielders rise
(Adds details, updates prices)
By Vivianne Rodrigues
NEW YORK, March 19 (Reuters) - The U.S. dollar extended a
sharp sell-off on Thursday, a day after posting its biggest
one-day loss against a basket of currencies since at least
1985, as investors digested Federal Reserve plans to buy
Treasury debt.
The Fed said on Wednesday it will will purchase $300
billion of long-dated Treasuries over the next six months, its
first large-scale purchases of government debt since the early
1960s, while also boosting buying of mortgage-backed securities
and agency debt in its bid to rescue the economy.
This raised concerns that an expansion of the Fed's balance
sheet -- which has already doubled in size in the past six
months -- would lead to oversupply of the world's main reserve
currency, triggering the sell off.
"Investors were already selling the dollar before the Fed,
but the announcement seemed to have given a green light for
more euro buying (and dollar selling)," said Marc Chandler,
global head of forex strategy at Brown Brothers Harriman in New
York. "This correction in euro-dollar seem to be moving towards
the $1.40 level. I wouldn't be surprised if we hit that mark
soon."
Still, Chandler said the sell off in the dollar may reverse
quickly once it trades at 1.40 to the euro as investors may see
it as an opportunity to take profits in the European currency.
In New York, the euro rose to as high as $1.3737 <EUR=>,
its strongest level since early January, and by late morning
was up 1.6 percent at $1.3720. The single currency jumped 3.8
percent on Wednesday for its biggest one-day rise since its
launch in 1999, according to Reuters data.
The dollar index <.DXY>, a gauge of its performance against
a basket of six major currencies, slipped 1.7 percent to 82.733
after a 3 percent slide on Wednesday -- its biggest one-day
drop in about of a quarter of a century, according to Reuters
data. It earlier slipped to 82.632, the lowest since early
January.
Against the yen, the dollar was 2.1 percent lower at 93.71
yen <JPY=> after falling almost 3 percent on Wednesday.
CRUMBLING DOLLAR
Lackluster U.S. data showing the number of U.S. workers on
jobless benefits hitting a record high tempered dollar losses a
bit by underscoring the severity of the U.S. economic
recession. For details, see []
Negative data has benefited the dollar in recent months as
investors buy the currency as a haven amid a global slowdown,
though that dynamic has faded since the Fed's surprise move.
"The data's impact should fade and the dollar should
continue to weaken because the markets are still digesting the
Fed's decision on buying long-term treasury debt," said Nick
Bennebroek, head of FX strategy at Wells Fargo Capital Markets
in New York.
ING strategists said the euro would be a major beneficiary
of the Fed's 'shock and awe' policy, adding that new dollar
supply and debt monetisation meant a run-up to the $1.40 area
could be on the cards even though the single currency bloc
faces severe economic problems.
Commodity currencies such as the Australian dollar <AUD=>,
Norwegian crown <NOK=> and Canadian dollar <CAD=> also rose on
Thursday while many emerging market currencies such as Brazil's
real <BRL=> and and the Mexican peso <MXN=> gained.
"Emerging market currencies are not homogeneous and should
be taken separately," said Chandler at Brown Brothers. "But for
now, most seem to be rebounding sharply against the dollar."
(Additional reporting by Gertrude Chavez-Dreyfuss in New
York and Kirsten Donovan in London; Editing by tktk)
