FOREX-Dollar licks its wounds after Fed gores bulls

* Dollar steadies after its biggest fall vs euro in six years

* Fed statement is far less hawkish than expected

* Some see USD as vulnerable to further correction

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, March 19 (Reuters) - The dollar nursed hefty losses on Thursday, having suffered its biggest one-day fall against the euro in six years after the Federal Reserve struck a much more dovish than expected tone on interest rates while highlighting the currency's drag on U.S. exports.

As expected, the Fed dropped the word "patient" from its statement in terms of raising interest rates, but it also downgraded its views on the economy and inflation and lowered its interest rate trajectory. That signalled a far more gradual path to policy normalisation than many investors had expected.

Against the yen, the greenback slid as low as 119.29 overnight, its lowest since Feb. 27, trading below 120.00 for the first time in nearly three weeks. It recovered some ground to last stand at 120.13 yen, slightly higher on the day.

"People are still cautiously buying dollar/yen," Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm. "I'm convinced that even after this selloff, the dollar has a solid base against the yen because people are buying on dips."

But the sharp dollar selloff dealt a severe blow to the confidence of many dollar bulls. Some market participants said strong U.S. data was needed for sentiment to turn and the dollar to resume its rally, while others said positioning suggested the dollar's correction could continue in the meantime.

Fed Chair Janet Yellen, who like most central bankers tends to avoid discussing currencies, told reporters the strong dollar is compressing inflation "at least on a transitory basis," which suggests a tacit admission that the soaring dollar has stalled the central bank's policy-tightening plan.

In the wake of the Fed's revelation, U.S. Treasury yields dived and Fed funds futures surged as a result. The dollar index skidded, retreating from a 12-year peak set on Friday. It was last down 0.7 percent on the day at 97.881.

The greenback's slide caught many investors short. The latest data from the Commodity Futures Trading Commission on Friday showed currency speculators piled into long dollar bets in the week ended March 10, with net long positions rising to their highest level in four weeks.

The euro bounced as high as $1.1062 on Wednesday in the wake of the Fed's announcement, well off a 12-year trough of $1.0457 plumbed on Monday. It has since drifted back down to $1.0822, down about 0.4 percent on the day.

"Our technical analysts now say we are looking at a bullish short-term trend reversal in EUR/USD that opens up $1.1016 and $1.1098 on the topside," said Elsa Lignos, senior currency strategist at RBC Capital Markets.

"But fundamentally we like layering into a EUR/USD short and adding to the position between $1.1050 and $1.11, targetting an eventual move to parity."

Commodity currencies also benefited from the dollar's slide. The Australian dollar hit an overnight peak of $0.7846. It was last down about 0.2 percent at $0.7758 but well off a six-year trough of $0.7561 set earlier this month.

Central bank meetings in Switzerland and Norway will take centre stage later in the session.

(Editing by Chris Reese and Eric Meijer)

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