Dollar off two-decade high as Fed delivers on 75bp hike

The dollar retreated from a 20-year high on Thursday after the Federal Reserve delivered its biggest rate hike in decades but then tempered its outlook by telling investors that such sharp moves higher were unlikely to become a habit.

Markets had expected the 75 basis point hike and priced in several more after a surprisingly hot inflation reading last week. The dollar had scaled new heights as US yields rose, but it lurched lower after Chair Jerome Powell's press conference.

It last traded at $1.0464 per euro, while in the Asia session the Australian dollar tacked another 0.4% on to its almost 2% overnight surge to hit $0.7031.

The dollar index, which made a two-decade high of 105.79 on Wednesday, traded at 104.84 in Asia.

"Today's 75-basis-point increase is an unusually large one," Powell told reporters.

"I do not expect moves of this size to be common," he said, though adding that next month either a 50 bp or 75 bp hike was likely.

Fed members also drastically lifted their projections for the peak in the benchmark funds rate, with the median forecast having it around 3.8% in 2023, much higher than the 2.8% peak they had last projected in March.

That, however, was met with initial relief as it was a bit lower than the 4%-and-above that futures markets had implied earlier this week.

"Against a market pricing in a ~3.75% Fed funds rate by year-end, (Powell's) comments soothed the market and that weighed on the dollar," analysts at ANZ Bank said in a note.

"Some unwind of volatility is likely in coming days as US policy expectations fall back to earth, but the Fed still has plenty to do... risk appetite has breathed a sigh of relief - let's see if it lasts."

A small dip on the yen was already being unwound on Thursday morning as the Fed's tone is in stark contrast with the Bank of Japan's redoubling of efforts to pin interest rates near zero.

The yen last traded at 134.39 per dollar after finding a 24-year low of 135.60 on Wednesday.

The Bank of Japan meets on Friday amid a speculative attack on its yield-curve-control policy that has made for erratic trade in Japanese government bonds this week.

The dollar eased against the New Zealand dollar, but the kiwi struggled to make further progress on Thursday after data showed an unexpected contraction in the economy. 

It last bought $0.6292.

Sterling held overnight gains at $1.2178 ahead of a Bank of England meeting later in the day that is expected to bring at least a 25 bp hike, with swaps pricing implying about an 80% chance of a 50bp hike. 

Traders will also be closely watching several speakers from the European Central Bank after the ECB promised to control borrowing costs for the currency's bloc's periphery after an emergency meeting on Wednesday.