NEW YORK (Reuters) - The dollar posted steep losses against major currencies on Wednesday after the Federal Reserve raised interest rates as expected but signaled a more gradual pace of monetary tightening this year than many in the market anticipated.
The greenback fell to a five-week low against the euro, a four-week trough versus the Swiss franc and a two-week low against the yen and sterling.
The Fed on Wednesday lifted the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent.
But further rate increases would only be "gradual," the Fed said in its policy statement, with officials sticking to their outlook for two more rate hikes this year and three more in 2018. The Fed lifted rates once in 2016.
Prior to the Fed's decision, investors had been pricing in at least four rate hikes this year.
"In largely sticking with its previous median interest rate projections, the Federal Reserve expressed a lack of conviction in the economic relief rally that has lifted global financial markets to historic levels," said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.
"After a massive buildup in long positions earlier this week, currencies are in full reversal mode, with the dollar falling aggressively."
The dollar index fell to two-week lows and was last at 100.780 .DXY, down 0.9 percent.
The euro rose to five-week highs against the dollar and last changed hands at $1.0696 EUR=, up 0.9 percent.
Against the yen, the dollar fell to two-week lows and last traded at 113.43 yen JPY=, down more than 1 percent on the day.
Yet despite the dollar's sharp losses on Wednesday, Bill Northey, chief investment officer at the private client group of U.S. Bank in Helena, Montana, said the currency's weakness is only short-term in nature.
"We continue to believe that there is strong underpinning for U.S. dollar strength in the more intermediate term," Northey said.
"That's based on the rate differential path to monetary policy among major central banks around the world. And that's not likely to change."
Fed funds futures have priced in a nearly 50 percent chance of another rate increase in June and an almost 60 percent probability of one at the July meeting, according to the CME's FedWatch.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Chris Reese and Meredith Mazzilli