* Dollar index suffers biggest fall in six years
* Fed sounds far less hawkish than expected
* USD seen vulnerable to further correction
By Ian Chua
SYDNEY, March 19 (Reuters) - The dollar nursed hefty losses on Thursday having suffered its biggest one-day fall in six years after the Federal Reserve struck a dovish tone on interest rates while highlighting the currency's drag on U.S. exports.
The Fed not only downgraded its views on the economy and inflation but also lowered its interest rate trajectory, signalling a path to policy normalisation that is far more gradual than some had expected.
U.S. Treasury yields dived and Fed funds futures <0#FF:> surged as a result. The dollar index skidded more than 2 percent, retreating from a 12-year peak set on Friday.
The vicious dollar selloff dealt a severe blow to dollar bulls, and traders said strong U.S. data will now be needed for confidence to return.
"The U.S. dollar remains at risk of facing a larger correction over the near term," said David Song, currency analyst at DailyFX.
The euro bounced as high as $1.1062, well off a 12-year trough of $1.0457 plumbed a few days ago. It has since drifted back down to $1.0830.
"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, targeting an eventual move to parity."
Against the yen, the greenback slid below 120.00 for the first time in nearly three weeks, before recovering a bit of ground to last stand at 120.22.
Commodity currencies were also sharply higher with the Australian dollar at $0.7745, not far from the overnight peak of $0.7846. It was well off a six-year trough of $0.7561 set earlier in the month.
Traders said an absence of major economic data could see many currencies consolidate in Asia. In Europe, central bank meetings in Switzerland and Norway will take centre stage.
(Editing by Chris Reese)