FOREX-Dollar gains on Fed confidence, rate rise seen sooner

(Updates with late New York prices, adds comment)

* Dollar stronger after Fed signals underlying economic strength

* Greenback surges to three-week high against yen

* Dollar rises to fresh 4-1/4-year high against Norwegian crown

By Daniel Bases

NEW YORK, Oct 29 (Reuters) - The U.S. dollar surged higher on Wednesday after the Federal Reserve signaled confidence the U.S. economic recovery remained on track while investors started to bet on an interest rate increase sooner than previously expected.

Language in the Fed's statement largely dismissed recent financial market volatility and focused on gradually improving labor markets. The Fed however did not change its benchmark interest rate but did end its monthly bond purchase program, known as quantitative easing, that was put in place to help keep market interest rates low in order to spur lending and investment.

"The dollar-positive move you are seeing right now is relative to where the market was. This came in as a more optimistic and more hawkish statement in the fact that it didn't discuss greater risks to the U.S. overall. It didn't seem to imply there was any real delay from what the Fed has communicated before," said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York.

"The market pricing was for October of 2015 for the first Fed hike. FOMC language, and Fed present language has been for June 2015. So the market is now going to be taking some of its certainty off October and placing it more back towards June and that is ultimately going to be a dollar-positive currency move," he said.

The dollar index, which measures the currency against a basket of major U.S. trading partners, spiked to a three-week high in the wake of the statement. It traded up 0.75 percent at the high of the day around 86.041.

Investors sold the euro to a one-week low, dropping it to $1.2631 for a loss of 0.76 percent on the day after it had gyrated above and below the unchanged mark much of the session.

The dollar hit a three-week high of 108.96 yen before dipping back to 108.88 yen, up 0.67 percent on the day.

A more hawkish Fed stance further illustrated the divergence in central bank monetary policies globally, with the United States looking to raise interest rates while others, particularly in Europe, are looking to lower them or loosen policy to spur moribund growth.

This contrast was starkest against the Norwegian crown as the dollar climbed 1.38 percent to 6.70 crowns, its strongest since June 2010.

Data earlier on Wednesday showed unemployment in oil-rich Norway surged and consumption fell, fueling bets its central bank would cut rates.

"We'll never really know how much good QE has done the U.S. economy because we can't say where we would be without it. But the contrast between the U.S. recovery and Europe's listless economy is stark. You have to wonder how much of that recovery would have taken place without QE," said Luke Bartholomew, investment manager at Aberdeen Asset Management (Other OTC: ABDNF - news) in London. (Additional reporting by Jemima Kelly in London; Editing by David Gregorio and James Dalgleish)