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Dollar rallies, yen under pressure ahead of BOJ rate decision

(Reuters) - The dollar hit fresh peaks against a handful of currencies on Thursday, sitting around its highest versus the yen since early November, after the U.S. Federal Reserve struck a sternly hawkish tone after holding rates steady.

Sterling and the euro sank to fresh multi-month lows as questions ramp up about whether the Bank of England may follow its U.S. peer in pausing rates later on Thursday.

The Australian and New Zealand dollar also lost ground, although the Kiwi was buoyed somewhat by stronger-than-expected GDP numbers out earlier in the morning.

The dollar index, which measures the currency against a basket of rivals, rose as high as 105.68, its strongest since early March, before settling slightly lower at 105.55.

The Fed met market expectations at its monetary policy meeting on Wednesday, holding interest rates steady at the 5.25% - 5.50% range.

The U.S. central bank, however, stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.

"Many people went into the Fed meeting expecting a hawkish hold, but it was a more hawkish hold than widely anticipated," said Moh Siong Sim, FX strategist at the Bank of Singapore.

Along with another possible rate hike this year, the Fed's updated projections show significantly tighter rates through 2024 than previously expected.

The Japanese yen was feeling the heat after the Fed meeting, hovering around 148.39 per dollar after touching a nearly ten-month low of 148.47 earlier on Thursday.

Even as dollar/yen slips back toward levels seen at the end of last year, the possibility of the Bank of Japan tightening policy at Friday's meeting remains slim.

"It seems unlikely the BOJ will announce any change of policy tomorrow, or soon for that matter. Although you never know for sure with this central bank," said Matt Simpson, senior market analyst at City Index.

While Japan's Chief Cabinet Secretary Hirokazu Matsuno issued more warnings on Thursday that authorities wouldn't rule out any options in addressing excess volatility in currency markets, Simpson said the risk could be limited to verbal intervention.

"They may not actually intervene if the trend remains orderly."

Elsewhere, sterling was last trading at a $1.2319, just above a fresh four-month low against the greenback ahead of the Bank of England's rate decision later in the day.

Data released on Wednesday showed that Britain's high inflation rate unexpectedly slowed in August, raising questions about how much higher the central bank will take interest rates.

Market participants had leaned heavily toward the BOE hiking rates again on Thursday for what would be the 15th time, but expectations quickly shifted following the data.

The euro stood at $1.0635 after falling to a six-month low of $1.0617.

Both the Australian and New Zealand dollars took a hit following the Fed's meeting, with the Aussie last down 0.6% and the Kiwi falling over 0.3%.

The Kiwi, however, got some support after data out on Thursday morning showed New Zealand's economy grew more than expected in the second quarter.

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