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Dollar rises more than 1% after Fed raises rates, sees 3 hikes in 2017

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The U.S. dollar hit its highest level against the yen in 10 months and gained against other major currencies on Wednesday after the Federal Reserve raised interest rates for the first time this year and signalled a faster pace of increases in 2017.

The dollar rallied about 1.87 percent against the yen to 117.31 yen, its highest since Feb. 8, after the U.S. central bank raised the target federal funds rate by 25 basis points to between 0.50 percent and 0.75 percent. The Fed's median outlook for rates rose to three quarter-point increases in 2017 from two as of September.

The Fed's last rate increase was a year ago, when it moved rates from the zero lower bound reached during the 2007-2009 financial crisis.

All 120 economists in a recent Reuters poll had expected such a rate hike. Of more significance to markets were new forecasts for future rates, as well as Fed Chair Janet Yellen's press conference, which began at 2:30 p.m.

Analysts said just one additional rate increase projected into next year, combined with a cautious tone in the policy statement, had boosted the dollar without sending it excessively higher.

"The rise in the dollar is really being driven by the shift from two to three hikes next year, which obviously isn't priced by the market," said Ian Gordon, FX strategist at Bank of America Merrill Lynch in New York.

"The overall tone of the statement is generally still somewhat cautious," Gordon added. He cited the Fed's reference to risks to the economic outlook as having been roughly balanced, as well as discussion of the shortfall in inflation, as examples.

The euro fell about 1.1 percent against the dollar to a session low of $1.0507, easing from a six-day high of $1.0669 touched before the Fed decision. The dollar index was up 1.17 percent also on pace for best day since June 24 when the index gained 2.49 percent.

Sterling was down 0.81 percent against the greenback at $1.2553.

"It's an argument for modest dollar strength, but not necessarily in and of itself going to change the bigger picture," said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York, on the Fed decision.

"The game was higher U.S. yields, which has been in place for some time, a higher dollar against core defensive currencies like the euro and the yen, and that trend persists."