(Reuters) - Asian shares enjoyed their best session in 18 months on Thursday as investors priced in a later start and a slower pace for future U.S rate rises, slashing sovereign bond yields from Japan to Australia.
The shift in rate expectations hit the dollar hard at first, though the damage lessened as the session wore on. The formerly friendless euro had found itself as high as $1.10625 EUR= in wild trade on Wednesday, only to fade to $1.0767 in Asia.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 1.6 percent, its largest daily gain since September 2013. Australia's main index .AXJO jumped 1.9 percent led by banks as markets wagered on lower domestic rates.
The only laggard was the Nikkei .N225 which slipped 0.2 percent in reaction to a firmer yen.
Short-term U.S. yields boasted their biggest drop in six years after the Federal Reserve trimmed forecasts for inflation and growth, and said unemployment could fall further than first thought without risking a spike in inflation.
The median projection for the Fed funds rate at the end of 2015 was cut to 0.625 percent, down half a point from December.
Fed Chair Janet Yellen also sounded uncomfortable with the strength of the dollar, saying it would be a notable drag on exports and a downward force on inflation.
There was nothing in the statement to suggest that the Fed is leaning toward a June hike, said Michelle Girard, chief U.S. economist at RBS.
Developments leave us feeling more comfortable with our official call for the first rate hike being in September.
The market reaction was immediate and dramatic. Fed fund futures <0#FF:> surged as investors sharply scaled back expectations for how fast and far rates might rise.
The December contract rocketed to 99.59, implying a rate of 41 basis points and completely reversing the impact of the last two payrolls reports. Yields on two-year notes US2YT=RR peeled off to 0.55 percent, down a huge 12 basis points post-Fed.
RATTLED DOLLAR
The rally then rippled out to other bond markets, driving short-term yields in Australia to all-time lows and a similar reaction was expected in Europe.
The Fed's seeming caution on hikes rattled the dollar as investors have been massively long in the expectation its interest rate advantage could only get wider.
Against a basket of currencies, the dollar was down 0.3 percent .DXY=, having shed 1.8 percent on Wednesday.
The Swiss franc, sterling and the Australian dollar all enjoyed solid gains, while the New Zealand dollar NZD= got an extra boost from upbeat growth data. [TOP/CEN]
The dollar fared better on the yen with a dip to 120.50 JPY=, having been around 121.00 before the Fed's statement.
Wall Street was encouraged by the prospect that policy might stay super-loose for longer and the Dow .DJI ended Wednesday up 1.27 percent. The S&P 500 .SPX rose 1.21 percent and the Nasdaq .IXIC 0.92 percent.
Among commodities, gold held firm at $1,171 an ounce XAU=, having climbed from $1,145 on Wednesday.
U.S. crude CLc1 was off 86 cents at $43.80, though that followed a gain of 3 percent on Wednesday. Brent LCOc1 was 46 cents easier at $55.45 a barrel.