The U.S. dollar was steady early on Thursday following its plunge to a 3-1/2-year low and then forceful rebound as traders grappled with the ramifications of the Federal Reserve's measured rhetoric on further interest rate cuts.

The Fed reduced rates by a quarter point on Wednesday, as expected, and indicated it will steadily lower borrowing costs for the rest of this year, initially sending the dollar plunging.

However, Fed Chair Powell characterised the day's policy action as a risk-management cut in response to the weakening labour market, but the central bank does not need to rush easing.

The Fed's closely watched dot plot of policy expectations predicted a median 50 basis points of additional cuts over the remaining two policy meetings this year, but only one additional reduction in 2026.

"The revised forecasts highlighted the degree of uncertainty that remains over the outlook," said Elliot Clarke, head of international economics at Westpac.

"The timing and scale of the forecast rate cuts also point to lingering risks for inflation."

The dollar dropped to the lowest since February 2022 at 96.224 against a basket of major peers immediately after the rate decision, but sprang back vigorously to be as much as 0.44% higher on the day at 97.074.

The euro was steady at $1.1818 early on Thursday, after a round trip to the highest since June 2021 at $1.19185 in a knee-jerk reaction to the Fed announcement.

Sterling was flat at $1.3626 after briefly leaping to the highest since July 2 at $1.3726 on Wednesday.

The Bank of England announces its own policy decision later on Thursday, and is widely anticipated to keep rates at 4%.

Official figures on Wednesday showed British inflation at an annual 3.8% in August, in line with a Reuters poll, reinforcing market expectations that further rate cuts are unlikely soon.

Economists polled by Reuters earlier this month expect one more rate cut by the end of the year.

The dollar edged down 0.08% to 146.815 yen in the latest session, after weakening as much as 0.67% to the lowest since July 7 at 145.495 yen overnight before slingshotting back.

The Bank of Japan is widely expected to refrain from hiking rates on Friday, although markets price in a quarter-point increase by end-March, with about 50% odds of it happening within this year.

The spotlight is on an October 4 vote where the ruling Liberal Democratic Party will elect a new leader to replace outgoing Prime Minister Shigeru Ishiba, who is stepping down following a bruising defeat in upper house elections.

New Zealand's dollar weakened 0.49% to a one-week low of $0.5935 after data showed the country's economy shrank more than expected in the second quarter.

The Aussie dollar was steady at $0.6655 ahead of the release of jobs data later in the day.

The greenback was steady at C$1.3772 after the Bank of Canada on Wednesday cut rates by a quarter point to a three-year low, as expected, citing a weak jobs market and less concern about underlying pressures on inflation.

Source: Reuters