By Wanfeng Zhou
NEW YORK, June 20 (Reuters) - The dollar edged lower against the euro in volatile trade on Wednesday after the Federal Reserve extended its latest monetary stimulus, saying it was ready to do even more to help support a U.S. economic recovery that looks increasingly fragile.
The U.S. central bank expanded its "Operation Twist" program, an effort to keep borrowing costs down by selling short-term securities and buying long-term ones. The move was largely expected by investors.
The Fed also slashed its forecasts for U.S. economic growth. In a press conference following the Fed meeting, Bernanke said the central bank would consider further asset purchases if the economy needs further support.
The dollar had initially rallied after the Fed announcement as some investors were disappointed that the central bank did not signal another round of quantitative easing. That also weighed on riskier, growth-linked currencies such as the euro and Canadian and Australian dollars , but the move faded.
"While the market was clearly looking for more from the Fed, their significant downgrades to growth, inflation and employment certainly keeps the door open for outright quantitative easing (QE3) later in the year," said Chris Tevere, senior currency strategist at Forex.com in New York.
The euro last traded at $1.2700 , up 0.1 percent on the day, having hit a session low of $1.2636 on Reuters data after the Fed announcement.
Adding to positive sentiment toward the euro, a conservative-led government took power in Greece on Wednesday and promised to negotiate softer terms on its harsh international bailout.
A proposal put forward by Italy for the euro zone's rescue funds to start buying the debt of distressed European countries also supported the common currency. The proposal is expected to be discussed at a meeting of European leaders on Friday but it would require a huge shift in Germany's stance for it to gain credence. German Chancellor Angela Merkel said that both of Europe's bailout funds included mechanisms for buying state debt on the secondary bond market but stressed that this was a "purely theoretical" question and was not being discussed.
The euro could see a bounce if the proposal is implemented although a sustained rise is unlikely, traders said.
The euro was up 0.9 percent against the safe-haven yen , at 101.05 yen, while the dollar rose 0.8 percent against the Japanese currency to 79.56 yen .
The greenback's weakness saw sterling trade near a one-month high at $1.5778 , despite minutes from the latest meeting of the rate-setting committee of the Bank of England showing policymakers are on the verge of another round of monetary easing in the UK. But the pound later gave up gains and last traded at $1.5712, slightly down on the day.Editing by Gary Crosse)
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