By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The dollar dropped to a five-week low against a basket of currencies on Thursday, still reeling from the previous session, when a statement from the U.S. Federal Reserve failed to signal a much faster pace of monetary policy tightening.
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 stuck to its original forecast of three rate increases this year. Investors were expecting four rate hikes in 2017.
The dollar on Thursday slid to a two-week-low against the yen, and a six-week trough versus the euro.
But James Chen, head of research at Forex.com in Bedminster, New Jersey, said the dollar's weakness should be short-lived.
"Projections for the path of Fed rate hikes are essentially the same as they were in December and could very well accelerate at any time in reaction to expected fiscal policies and inflation pressures," said Chen.
"Therefore, it remains unlikely at this point that a new bearish trend has begun for the dollar."
U.S. homebuilding increased 3.0 percent last month and jobless claims fell in the latest week, data showed on Thursday, signs the economy remained on solid ground and helping to make the case for multiple rate hikes this year.
In late trading, the dollar index fell 0.4 percent to 100.37 <.DXY>. It slid to as low as 100.35, its weakest level since Feb 9. Against the yen, the dollar slipped to 113.28 yen, down 0.1 percent, after earlier falling to a two-week trough.
Chicago-based Ron Waliczek, managing director of over-the-counter FX and interest rates at INTL FCStone, said going into Wednesday's Fed decision, the dollar had been overdone and had been so since 2014.
If ever there was a time when the dollar would consolidate and move lower, Wednesday provided the perfect opportunity as the market built in expectations of a more aggressive rate-hike pace, he said.
The euro rose to a six-week high against the greenback and was last at $1.0751 <EUR=>, up 0.2 percent.
The single European currency was earlier bolstered by a defeat in Dutch elections of far-right leader Geert Wilders, which eased broader fears of a populist drift in European polls this year.
Sterling, meanwhile, rose on some surprise hints about the chances of a rise in UK interest rates. The pound <GBP=D3> hit a two-week high of $1.2373, after the Bank of England kept rates on hold but gave a handful of hints in voting results and its minutes that it might raise them soon.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci)