As a result of the U.S. Federal Reserve's announcement that it has turned a corner in its fight against inflation, markets gained confidence that the end of its rate-hiking campaign is near.
Investors took a dovish hint from Fed Chair Jerome Powell's words on Wednesday that "the disinflationary process has started" in the world's largest economy, even though he also indicated that interest rates would continue to rise and that rate cuts were not imminent.
Wednesday's Fed statement, which followed the conclusion of a two-day policy meeting in which policymakers decided to raise interest rates by 25 basis points, represented the central bank's first explicit acknowledgement of decelerating inflation.
Following Powell's speech, the dollar plummeted, and the U.S. dollar index sank to a nine-month low of 100.80 versus a basket of currencies.
It was last down 0.12% at 100.83, dropping by over 1% on Wednesday.
Ray Attrill, head of FX strategy at National Australia Bank, stated, "It was very much a sort of relief ... that there was nothing there to seriously challenge the market's prevailing view" (NAB).
"(Powell) said that rates will have to be restrictive for some time, but that doesn't dissuade the market from saying some time might be six months, rather than two years."
The Australian dollar rose to a fresh eight-month high of $0.7158 in early Asia trade on Thursday, following a 1.2% increase in the previous session.
The dollar declined 0.55 per cent against the yen to 128.21.
The kiwi rose more than 1 per cent on Wednesday and last traded at $0.6523, up 0.25 per cent.
The stage is now set for the European Central Bank (ECB) and the Bank of England (BoE) to announce their rate decisions later on Thursday, with both expected to increase rates by 50 basis points (bp).
The euro reached a 10-month high of $1.1034 on Thursday after gaining 1.2% in the previous session, while the sterling was last up 0.19% at $1.2399.
"The risk is that we receive a hawkish 50 from the ECB and a dovish 50 from the Bank of England," said NAB's Attrill. "This could create some volatility."
According to data released on Wednesday, inflation in the Eurozone slowed for a third consecutive month in January. Still, any respite for the ECB may be limited as the underlying price rise remains stable, and concerns have already been raised about the accuracy of the estimates.
Attrill stated, "I don't think that's going to influence the messaging from the ECB, which I think is still going to be that (they've) got a lot to do,"
Friday's nonfarm payrolls report will be the next test of the Fed's fight against inflation in the United States, despite Wednesday's JOLTS report showing an unexpected increase in job vacancies in December, indicating a still-tight labour market.
The markets now anticipate that the Fed funds rate will peak at just below 4.9% in June, as opposed to earlier predictions of a high of just below 5%.