US dollar suffers biggest one-day fall in 6 years after Fed strikes dovish tone on rates

SYDNEY (Reuters) - The US dollar nursed hefty losses on Thursday having suffered its biggest one-day fall in six years after the Federal Reserve struck a dovish tone on interest rates while highlighting the currency's drag on U.S. exports.

The Fed not only downgraded its views on the economy and inflation but also lowered its interest rate trajectory, signalling a path to policy normalisation that is far more gradual than some had expected.

U.S. Treasury yields dived and Fed funds futures surged as a result. The dollar index skidded more than 2 per cent, retreating from a 12-year peak set on Friday.

The vicious dollar selloff dealt a severe blow to dollar bulls, and traders said strong U.S. data will now be needed for confidence to return. "The U.S. dollar remains at risk of facing a larger correction over the near term," said David Song, currency analyst at DailyFX.

The euro bounced as high as US$1.1062, well off a 12-year trough of US$1.0457 plumbed a few days ago. It has since drifted back down to US$1.0830.

Against the yen, the greenback slid below 120.00 for the first time in nearly three weeks, before recovering a bit of ground to last stand at 120.22.

Commodity currencies were also sharply higher with the Australian dollar at US$0.7745, not far from the overnight peak of US$0.7846. It was well off a six-year trough of US$0.7561 set earlier in the month.

Traders said an absence of major economic data could see many currencies consolidate in Asia. In Europe, central bank meetings in Switzerland and Norway will take centre stage.