SYDNEY Wed Mar 18, 2015 7:34pm EDT

The dollar nursed punishing losses in Asia on Thursday after investors priced in a later start and a slower pace for future U.S rate rises, slashing Treasury yields and firing up Wall Street stocks.

The formerly friendless euro found itself up at $1.0835 EUR=, having jumped 2.8 percent on Wednesday, while oil held gains of 5 percent as the dollar retreat lifted commodities.

Early signs were also promising for regional stocks with MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS up 0.9 percent.

Short-term U.S. yields boasted their biggest drop in six years after the Federal Reserve trimmed forecasts for inflation and growth, and said unemployment could fall further than first thought without risking a spike in inflation.

The median projection for the Fed funds rate at the end of 2015 was cut to 0.625 percent, down half a point from December.

Fed Chair Janet Yellen also sounded uncomfortable with the strength of the dollar, saying it would be a "notable drag" on exports and a downward force on inflation.

"There was nothing in the statement to suggest that the Fed is leaning toward a June hike," said Michelle Girard, chief U.S. economist at RBS.

"Developments leave us feeling more comfortable with our official call for the first rate hike being in September."

The market reaction was immediate and violent. Fed fund futures <0#FF:> surged as investors sharply scaled back expectations for how fast and far rates might rise.

Yields on two-year notes US2YT=RR nosedived 11 basis points to 0.56 percent as prices rose, the biggest daily rally since 2009.

The drop in yields pulled the rug out from under the dollar, as investors have been massively long of the currency in the expectation its interest rate advantage could only get wider.

It crashed 1.8 percent against a basket of currencies .DXY for the largest daily loss in six years. The Swiss franc, sterling and the Australian dollar all enjoyed similar gains, while the New Zealand dollar NZD= got an extra boost from upbeat growth data. [TOP/CEN]

The dollar suffered a little less against the yen to stand at 120.24 JPY= on Thursday, after a fall of 1.2 percent.

Wall Street was encouraged by the prospect that policy would stay super-loose for longer and the Dow .DJI ended Wednesday up 1.27 percent. The S&P 500 .SPX rose 1.21 percent and the Nasdaq .IXIC 0.92 percent.

Among commodities, gold rallied to $1,168.35 an ounce XAU=, having climbed from $1.145.00 on Wednesday.

U.S. crude CLc1 was quoted at $44.62 after gaining 3 percent on Wednesday. Brent LCOc1 had settled $2.40 higher at $55.91 a barrel.