Dollar hits two-week highs in wake of Fed rate hike

By Sam Forgione

NEW YORK (Reuters) - The U.S. dollar hovered near a two-week high against a basket of other major currencies on Thursday a day after the Federal Reserve hiked interest rates, on the view that the central bank's move would make U.S. assets more attractive.

Analysts said the monetary policy divergence between the tightening Fed and stimulative European Central Bank and Bank of Japan was firmly in place and drawing demand for the greenback.

The Fed's tightening policy fuels demand for higher-yielding U.S. debt compared to bonds in Europe and Japan, driving investment flows into the United States and boosting the dollar.

The euro fell 1 percent against the dollar to $1.08020, its lowest in a week and a half and last held near that level at $1.08070 . The U.S. dollar index, which measures the greenback against a basket of six major currencies, hit a two-week high of 99.294 <.DXY> and was last up 1.4 percent at 99.232.

"The Fed is gradually moving higher whereas other central banks, including the European Central Bank and the Bank of Japan, are maintaining accommodative policy," said Eric Viloria, currency strategist at Wells Fargo Securities in New York. "This is supportive of the dollar over time," he said.

Although Fed Chair Janet Yellen said Wednesday that tightening would be gradual, Fed officials' median projected target rate for 2016 remained at 1.375 percent. This implies four quarter-point rate hikes next year.

Analysts said some traders' surprise that the Fed's rate forecasts were not reduced continued to support the dollar.

"The median projection stuck to a trajectory for fed funds which is more hawkish than the market has been and even continues to price in," said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Limited in New York.

The dollar hit a more than one-week high against the Japanese yen of 122.880 yen . Sterling hit a roughly eight-month low against the dollar of $1.48685 .

China's yuan hit its lowest in more than four months in offshore trading against the dollar, of 6.5705. The onshore rate hit a 4-1/2-year low of 6.4842, falling for a 10th day in a row and its worst run on record.

(Reporting by Sam Forgione; Additional reporting by Jemima Kelly in London; Editing by James Dalgleish, Diane Craft)

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