Dollar steadies, off lows as Fed less cautious on policy

© Reuters. A woman counts U.S. dollar bills at her home in Buenos Aires

By Vatsal Srivastava

SINGAPORE (Reuters) - The dollar was steady in Asian trade on Thursday, and was off its overnight lows after the Federal Reserve rowed back from a more aggressive policy tightening path even as it gave markets the impression of being much less cautious than they had anticipated.

In a widely anticipated decision, the U.S. central bank hiked interest rates by 25 basis points and forecast fewer rate increases next year than it had at its September policy meeting.

Yet markets were surprised by the Fed's commitment to retain the core of its plan to tighten monetary policy, despite rising uncertainty about global economic growth, sending Wall Street stocks tumbling and depressing Asian equities.

"Investors had braced for the worst - from no rate hike to dissents and a change in the risk assessment," said Kathy Lien, managing director of currency strategy at BK Asset Management.

"And while there were subtle tweaks in the statement and lowered growth and inflation forecast, these changes were not as significant as the market had hoped."

Indeed, while the Fed's 'dot plots' now signal two, instead of three, rate hikes for next year, the market remains unconvinced and is barely pricing one increase in a reflection of the slowdown in global growth.

The dollar index (DXY) was a touch higher at 96.99 in early Asian trade, managing to recover from an overnight low of 96.55 and the New York close of 96.97 as markets came to terms with the Fed's outlook.

"Forward guidance was much more balanced relative to the market dovish expectation. This should prove moderately positive for USD risk heading into the New Year," said Stephen Innes, head of trading in Asia at Oanda.

In a press conference, Fed Chairman Jerome Powell suggested that the expected two hikes for 2019 weren't set in tone.

"There would be circumstances in which it would be appropriate for us to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so," Powell told reporters.

Oanda's Innes expects the dollar to strengthen against commodity currencies such as the Australian dollar , which fell one percent overnight to its lowest level since Nov.1. The Aussie dollar was last fetching $0.7108.

The yen weakened by 0.1 percent against the dollar, changing hands at 112.57, having gained for four days in a row. The focus for yen traders will be on the Bank of Japan's rates decision later in the day, though policy makers are widely seen maintaining their ultra-loose monetary settings.

The euro (EUR=) gained 0.1 percent on the dollar to $1.1385. The single currency was supported by news Italy had struck a deal with the European Commission over its contested 2019 budget.

The kiwi dollar was steady after losing 1.2 percent overnight, and falling briefly on weak economic data. It was last at $0.6775.

New Zealand's economic growth slumped to its lowest in almost five years in the third quarter, stoking talk the central bank might take a more dovish monetary policy stance in 2019.