* Dollar rebounds against most major currencies
* Dollar set for sharp weekly loss after Fed announcement
* Euro set for biggest weekly rise since 1999 inception
* Euro zone drafts rescue plan, industrial output plunges
(Adds comments, details, updates prices)
By Vivianne Rodrigues
NEW YORK, March 20 (Reuters) - The U.S. dollar rebounded
broadly on Friday, but was still set for its biggest weekly
drop against a basket of currencies since 1985, as the Federal
Reserve's plans to buy Treasury debt stoked inflation fears.
The euro reversed earlier gains with sentiment undermined
slightly by uncertainty over a plan to rescue weaker members of
the euro zone and data showing a plunge in industrial output.
For details, see []
But the single European currency was still on track for its
biggest ever weekly percentage gain against the dollar, despite
hefty profit-taking following its recent run-up.
"After that massive sell-off, I'm not surprised to see the
forex markets taking a pause and the dollar rebounding a bit,"
said Boris Schlossberg, director for currency research at
Global Forex Trading in New York. "But despite today's gains,
the dollar is still having its worst week since the '80s."
The Fed rocked financial markets on Wednesday with a
decision to buy more than $1 trillion dollars worth of
long-term government debt and mortgage securities.
The move has fanned concerns that a vast expansion of the
U.S. central bank's balance sheet beyond the current $2
trillion means an increase in the supply of U.S. dollars.
The announcement triggered a rally in stocks worldwide
while the dollar tumbled.
Also on Friday, the dollar briefly extended gains against
the yen after Fed Chairman Ben Bernanke said at a conference
the U.S. needs a safer way to shut down larger nonbank
financial firms. []
The greenback may resume its slide and trade at $1.40 per
euro in coming days, said Schlossberg, adding that in the
absence of economic news in the U.S. on Friday, traders will
take the opportunity to take profits on the European currency.
In midday trading in New York, the dollar index was up 0.7
percent on the day at 83.62 <.DXY>. The greenback has fallen
almost 5 percent against the basket of currencies this week,
and was heading for its biggest weekly decline since 1985.
"(We) are not convinced that the dollar selling is over,"
said Jessica Hoversen, a fixed-income and currency analyst at
MF Global Ltd, in Chicago. But she added that "trade should be
quiet heading into the weekend."
Hoversen said she is keeping a short-term bias on the
dollar. If euro/dollar closes above $1.3750, the pair may
quickly extend gains and test the next resistance level at
$1.3950, according to MF Global.
The dollar last traded 1.4 percent higher at 95.81 yen
<JPY=>, after hitting a session high of 96.26.
RECORD WEEK FOR EURO
The euro fell 0.6 percent to $1.3582 <EUR=>, having climbed
to a peak of $1.3737 on Thursday, its highest since early
January. But at current prices, the common currency was up more
than 5 percent from last Friday's $1.2922 close, its biggest
weekly percentage increase since its inception in 1999.
A senior German lawmaker said earlier that euro zone
countries had agreed a rescue plan to prevent members of the
currency bloc going bankrupt. []
The European Central Bank said comments the ECB has a
reserve fund to help euro zone states were untrue.
"Pressure is mounting on the ECB to follow the actions of
global central banks but their conservative and almost stubborn
reaction to the crisis will keep such an aggressive policy
response at bay for now," MF Global's Hoversen added.
A report in Europe earlier showed euro zone industrial
output plunged in January for a fifth straight month, pointing
to a further contraction in the economy. []
