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 NEW YORK: The euro rose to its highest level against the dollar in nearly 5 weeks as news the US Federal Reserve will keep interest rates low for longer than anticipated overshadowed an unresolved European debt and bank crisis.

While the dollar's safe-haven status remains a primary appeal, particularly with a Greece deal with its creditors remaining unresolved, unfavorable interest rate differentials could limit its allure versus higher yielding currencies.

The Federal Reserve pushed back the likely timing of an eventual interest rate hike until late 2014, much later than it had previously said, as it nurses a still-sluggish economic recovery.

"The risk is they are going to push that (forecast) out further at another Fed meeting. I still think that is the risk, but there's nothing in the distribution of the forecasts to lead you to that," said Ray Attrill, head of fx strategy for North America at BNP Paribas in New York.

The dollar, while down on the day, pared losses against the euro after the US Federal Reserve took the historic step of setting an inflation target. The 2 percent target moves the Fed in line with many of the world's other major central banks.

The euro last traded at $1.3084, up 0.4 percent, but down from a near 5-week high of $1.3102 after the Fed's interest rate announcement.

"The fact they expect to keep rates at these levels through late 2014 is somewhat bearish for the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington DC.

The yen, meanwhile, extended losses from the previous session as Japan's first annual trade deficit in more than 30 years called into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to fickle foreign investors.

The dollar reached as high as 78.28 yen, according to Reuters data, its highest since early November. The greenback was last trading at 78.82 yen, up 0.2 percent.

"We'd like to see it hold above that level" of 78 yen, Jespersen said. "We've seen a lot of accounts putting on short yen trades."

Chartists highlighted resistance posed by the 200-day moving average at 78.33 yen and the 61.8 percent retracement of the October-January fall at 78.31 yen.

The broad weakness in the yen lifted the euro to a four-week peak of 101.86 yen. It was last at 101.78 yen, up 0.6 percent on the day and well above an 11-year low struck on Jan. 16.

"Investors are waiting for more definitive progress in talks for private sector bondholders to take voluntary losses on Greek government debt, while reports that the ECB remain opposed to restricting its Greek debt holding is weighing on sentiment," noted Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

The common currency has been supported against the dollar in recent sessions by a squeeze in extreme short positions. A decline in funding costs for Spain and Italy and recent data showing surprising strength in manufacturing and services this month have also lent support.

Copyright Reuters, 2012

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