The dollar fell broadly on Friday, hitting a four-month low against the euro as investors embraced riskier assets a day after the US Federal Reserve announced aggressive new stimulus to bolster the economic recovery. The Fed's decision, plus more confidence about the euro zone debt crisis after recent European Central Bank action, put the single currency on track for a 2.4 percent gain against the greenback this week, its best weekly performance since late January.
--- Euro seen extending rally
--- Focus on Bank of Japan meeting next week
The dollar has fallen against the euro for four straight sessions. Nonetheless, some strategists in the equity options market believe the greenback's woes are nearing an end. Traders aggressively scooped up bullish options in an exchange-traded fund tied to the US dollar index on Fri day.
The Fed on Thursday said it would embark on another phase of quantitative easing, buying $40 billion of mortgage-backed debt per month until the outlook for US jobs improved substantially. It also expects benchmark US interest rates to stay near zero until at least mid-2015.
"They are saying they want 200,000 to 300,000 new jobs per month for a prolonged period of time, and if they do not get that, they are not done," said Alessio de Longis, portfolio manager of the Currency Opportunities Fund at OppenheimerFunds in New York.
That should keep the dollar under pressure. "There are several countries that will do anything to resist currency appreciation, because world growth on a cyclical basis has never been this weak, excluding the fourth quarter of 2008," de Longis said.
That means steer clear of the yen and Brazilian real. A better way to bet against the dollar is against the euro and smaller European currencies such as the Norwegian crown, he said. The euro has gained 4.3 percent against the dollar so far in September, helped by the ECB's bond-buying and the German Constitutional Court backing the euro zone's bailout fund.
The ECB's recent pledge to buy bonds of troubled euro zone countries has also encouraged investors to buy euros, de Longis said. "We should be able to get to $1.35 in the euro simply based on additional short-covering by investors who have been dramatically underweight the euro and European equities," he said, adding that "if European data starts surprising to the upside, there is plenty of room to build fresh euro longs that could take us to $1.40."
The euro hit a peak of $1.3168, its highest level since early May. It was last at $1.3124, up 1 percent, as a drop in bond yields in smaller euro zone economies prompted investors to buy the currency. Currency speculators again turned negative on the US dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday.
"The Fed's decision and the ECB's action together are decisive and consequential and should underwrite risk appetite well into next year," said Richard Franulovich, senior currency strategist at Westpac Securities in New York. The euro zone's permanent bailout fund will be up and running at the end of next month, the chairman of the Eurogroup of finance ministers said on Friday, two days after Germany's top court gave it the go-ahead.
Risk-taking was also helped by better-than-expected US retail sales last month. A jump in the Thomson Reuters/University Michigan consumer sentiment index this month also boosted risk appetite. The Bank of Japan meets next week to decide on monetary policy, and the Ministry of Finance has increased its threats to intervene in the currency market in the past few days.
Traders in Asia said the BoJ, which conducts currency intervention on behalf of the finance ministry, checked rates on Thursday after the Fed's decision. Such checks are seen as a sign authorities may be edging closer to intervening. The dollar, however, gained against the yen, which fell broadly on speculation Japanese authorities could intervene to cap its recent gains against the dollar. Expectations that the Bank of Japan could ease policy next week in response to the Fed's action will also likely undermine the yen, traders said. The dollar hit a seven-month low of 77.11 yen on Thursday. It last traded up 1 percent at 78.28 yen, according to Reuters data.