* Dollar index drops to lowest in almost 5 months
* Sterling at highest in more than 6 mths, above $1.5800
* Dollar falls to 2-month low vs yen
* Fed says it considered buying more securities
By Satomi Noguchi
TOKYO, May 21 (Reuters) - The dollar fell to its lowest in
almost five months against a basket of currencies on Thursday,
extending a slide from the previous day after the Federal Reserve
said it considered buying more securities at its last policy
meeting.
The dollar hit a more than six-month low versus the pound and
a two-month trough against the yen as an increase in the Fed's
purchases of mortgage agency and government securities would
inject more dollars into the global financial system.
"The Fed said exactly what the market wanted to hear so it
could sell the dollar, although it's too early to say whether
it's a decisive trend that will hurt the dollar," said a
portfolio manager at a Japanese asset management firm.
"The dollar's current drop comes as fears ease about credit
and dollar funding, but traders are watching if the focus shifts
to a decrease in the value of the dollar expected to come sooner
or later," the manager said.
The dollar had rallied against a basket of currencies as
investors rushed to secure cash in dollars during the height of
the financial crisis.
In March the dollar index, a gauge of the greenback's
performance against six major currencies, reached its highest
since April 2006.
But the index retreated to 80.897 on Thursday, its lowest
since early January. That was partly due to improved risk
appetite as investors have turned more optimistic on views that
the worst of the global financial crisis has passed.
An appetite for risk in other currencies improved after U.S.
Treasury Secretary Timothy Geithner said on Wednesday the U.S.
financial system was "starting to heal", crediting an array of
emergency government programmes for helping ease a crisis sparked
by a surge in mortgage defaults. []
Sterling rose as high as $1.5817, its highest since early
November, before retreating to $1.5770 <GBP=D4>, up 0.2 percent
from late New York trade on Wednesday.
The euro was little changed from late U.S. trade at $1.3775
<EUR=>, staying near Wednesday's high of $1.3831 on trading
platform EBS, its highest since early January.
The dollar fell as low as 94.28 yen on trading platform EBS,
its lowest since March, before rebounding slightly to 94.50 yen
<JPY=>, down 0.4 percent. The euro fell 0.6 percent to 130.15 yen
<EURJPY=R>.
"Dollar/yen is simply catching up other currency pairs in
broad dollar selling. A fall in U.S. Treasury yields the previous
day is also encouraging the dollar's drop against the yen," said
Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ
Trust Bank.
U.S. Treasuries rallied on Wednesday after the release of the
minutes from the Fed policy meeting. []
Benchmark 10-year Treasury yields faced downward pressure
around 3.19 percent <US10YT=RR> after falling about 6 basis
points the previous day.
Investors will look to the Federal Reserve Bank of
Philadelphia's index of business activity in the U.S.
mid-Atlantic region at 1400 GMT and weekly data on claims for
jobless benefits at 1230 GMT for more signs that the economy's
deterioration is slowing.
"The dollar and the yen could fall against other currencies
and stocks are likely to rally if the Philadelphia Fed's survey
shows some improvement, warming up risk appetite further," said
Masafumi Yamamoto, head of FX strategy Japan at Royal Bank of
Scotland.
Economists expect weekly jobless claims to have slightly
decreased but remained at a highly recessionary level of 630,000.
A Reuters poll produced a median forecast for a reading of
-18 for the Philadelphia Fed's index in May, improving from the
April reading of -24.4. []
The Bank of Japan began a two-day policy board meeting on
Thursday. But traders said the event is unlikely to have much
impact because the central bank is widely expected to keep its
interest rates near zero. []
(Additional reporting by Rika Otsuka; Editing by Michael Watson)
