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Dollar sags on Fed's rate hike views, pound hits seven-week high before BoE

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar struggled against its peers on Thursday after the Federal Reserve indicated it was more likely to raise interest rate three times in 2018 instead of the four that some currency bulls had hoped for.

The Fed raised rates by 25 basis points to 1.75 percent on Wednesday and signaled two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.

The U.S. central bank also projected three hikes in 2019.

The greenback slipped, however, with investors who had bet on the Fed signaling four rate increases in 2018 instead of the widely anticipated three seen to have taken profits after the announcement.

The dollar index against a basket of six major currencies <=USD> was 0.3 percent lower at 89.528, after dropping as much as 0.7 percent overnight.

"The Fed hiking rates three times, and even four times, this year won't be too big of a surprise for the currency market, which fully expects the Fed to continue normalizing policy," said Shin Kadota, senior strategist at Barclays in Tokyo.

"On the other hand, there is still room for the market to price in other central banks normalizing policy. The dollar needs a big surprise to be jolted higher, something the Fed meeting did not provide," Kadota said.

The Bank of England's meeting later on Thursday is now in focus, with market participants keeping a close eye on the central bank's policy views after robust British wage data cemented expectations that the central bank will raise rates as early as May.

The pound extended its overnight rally and rose to a near seven-week high of $1.4171.

"Brexit negotiations have moved forward and this is expected to provide the BoE with a lift toward raising rates," said Takahiro Otsuka, market economist at Mitsubishi UFJ Morgan Stanley Securities. "Today's policy meeting will provide an opportunity to see if the BoE is prepared to tighten as early as May,"

The European Union on Monday said it had agreed to grant London a status-quo transition after it exits the bloc next year, until the end of 2020.

The dollar was down 0.3 percent at 105.700 yen <JPY=> after slipping about 0.5 percent the previous day.

The euro added 0.2 percent to $1.2363 <EUR=> following a gain of 0.8 percent overnight.

The Australian dollar, which rallied more than 1 percent overnight against a flagging greenback, was down 0.3 percent at $0.7744 <AUD=D4>.

(Reporting by Shinichi Saoshiro; Editing by Eric Meijer and Richard Borsuk)