U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022.
U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. Reuters / DADO RUVIC

The U.S. dollar was nursing its losses at a one-week low on Thursday after the U.S. Federal Reserve raised interest rates as widely expected but poured cold water on the idea that even larger hikes could lie ahead.

Expectations of a hawkish Fed have weighed heavily on markets this year and powered the dollar higher - versus a basket of its rivals, it is up more than 7% so far this year, on track for its biggest annual gains since 2015.

But the dollar weakened after the Fed announced its decision to raise interest rates by 50 basis points. Hedge funds trimmed extended long positions after Fed Chair Jerome Powell told reporters afterward that policymakers weren't actively considering 75-bp moves in the future.

The meeting held no real surprise but was slightly less hawkish than expected and while a 75-bp hike is no longer on the table for the FOMC meeting in June, inflation data and the direction of the war in Ukraine will dictate the Fed's next decisions, said analysts at Mirabaud.

Fed funds futures rallied to take some of the edge off markets' aggressive forecasts for U.S. rates, though a further 200 bps of hikes this year remain priced in.

The dollar index toppled from near a two-decade high and fell 0.9% to 102.450 in the wake of the Fed decision. It bounced 0.2% in early London trading but held at a one-week low.

Sterling rose more than 1% to $1.2637 on Wednesday but it was under pressure at $1.2548 in Asia ahead of a Bank of England (BoE) meeting where traders have fully priced a 25 basis-point rate hike.

The Aussie dollar's 2.2% leap was its largest since late 2011 and followed a surprisingly hawkish turn from the Reserve Bank of Australia, which began its cycle of interest rate rises with a larger-than-expected 25 bp hike on Tuesday. [AUD/]

The Aussie was last at $0.7214, edging a little lower from its overnight peak of $0.7265. The New Zealand dollar jumped 1.7%, its largest one-day rise in two years, to sit back above $0.65 at $0.6534.