Dollar on back foot after Fed scales back rate hike projections

By Hideyuki Sano

TOKYO (Reuters) - The dollar was on the defensive on Thursday after the U.S. Federal Reserve lowered its economic growth forecasts and scaled back its rate hike projections, cementing expectations that it will have to skip tightening next month.

The euro firmed to $1.12635 from this week's low below $1.1200. The yen hit a 20-month high of 105.41 to the dollar before stepping back to steady around 105.84.

The dollar's index against a basket of six major currencies <=USD> eased to 94.583 from a high of 95.043 touched on Wednesday before the Fed's policy announcement.

The Fed said slower economic growth would crimp the pace of monetary policy tightening in future years.

The projections of Fed policy members showed a majority of them still see two rate hikes this year. Yet six of them now see only one rate hike, compared to only one member in March.

Fed Chair Janet Yellen was not clear on whether a rate increase could come at the next policy meeting in late July, but investors decided lack of clear hint meant no hike next month, with interest rate futures effectively pricing out a July rate hike.

"Although the Fed's projection tout two rate hikes, a rate hike in July is highly unlikely, which makes it questionable whether the Fed can raise rates twice in its three policy meetings left by the end of year," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

Highlighting sluggish U.S. economic growth, U.S. manufacturing output unexpectedly fell 0.4 percent in May as motor vehicles and parts production recorded its biggest drop in nearly 2-1/2 years.

Following the Fed, the Bank of Japan will also announce its policy decision later on Thursday, though there is very limited expectations for easing.

Many investors think the BOJ would prefer to keep its powder dry for possible market disruption if British voters decide to leave the European Union in a referendum a week from now.

Likewise, the Bank of England and the Swiss National Bank are also expected to stand pat when they do a policy review later this week.

Concerns about Brexit kept sterling under pressure.

The British pound bounced back to $1.4198, about one cent above its two-month low of $1.4091 hit on Tuesday.

The Australian dollar stood flat at $0.7458 ahead of the release of Australian jobs data at 0130 GMT.

The New Zealand dollar gained 0.5 percent to $0.7076 , edging near one-year high of $0.7148 hit a week ago, helped by strong first quarter growth data as well as the Fed's cautious rates outlook.

(Editing by Shri Navaratnam)