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FOREX-Fed hands euro best weekly gain since early 2013

By Ahmed Aboulenein

LONDON, March 20 (Reuters) - The euro was on track for its best weekly performance in more than two years against the dollar on Friday, after the U.S. Federal Reserve provoked the biggest one-day sell-off in the greenback since the aftermath of the 2008 financial crisis.

The dollar plunged across the board on Wednesday after the Fed downgraded its projections for growth and inflation, pouring cold water on investor expectations of a June rise in U.S. interest rates.

The consensus that the dollar should continue to appreciate seems largely in place, dealers and analysts say, but there have been the first signs of cracks appearing in what had been a united front among the major banks.

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HSBC, one of the top half a dozen players in the foreign exchange market, on Thursday raised its euro forecast to $1.20 by the end of 2017, arguing that the dollar's explosive rally was nearing its end.

Having dived to as low as 96.628 against a basket of major currencies in the wake of the Fed, the dollar was trading at 98.729 on Friday, down 0.5 percent on the day and on track for its first week of falls in five.

"The Fed is the big mover because it increased uncertainty about a rate hike this year; the market is not reassured about it anymore," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The euro was 0.6 percent higher against the dollar at $1.07230, well below Wednesday's high above $1.10 but still the single currency's best weekly performance since January 2013.

Oliveri said he expected the dollar would continue to correct lower, attributing that to uncertainty related to U.S. inflation data due next week which he said was very important for rate expectations and could send the dollar lower against the euro, to around $1.08 or $1.0850.

"But from a broader perspective we still think that euro/dollar should still be sold and that any levels above $1.09 should ultimately prove unsustainable," he said.

Against the yen, the dollar was 0.1 percent higher at 120.88 yen, comfortably above its Wednesday post-Fed low of 119.29.

"Pressure will remain on the yen as before. Today, there is a shortage of fresh trading incentives, so the yen has come back a bit," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

The Bank of Japan stood pat on policy earlier this week, as it has every month since expanding its massive stimulus programme in October last year.

(Additional reporting by Lisa Twaronite in Tokyo; Editing by Toby Chopra)