* Dollar index at highest since July 2020
* Hawkish Fed bolsters greenback
* Yuan set for biggest daily fall since July 2021 (Adds comment, fresh prices)
By Herbert Lash and Dhara Ranasinghe
NEW YORK/LONDON, Jan 27 (Reuters) - The dollar soared to its highest levels since July 2020 against other major currencies on Thursday, powered by bets the U.S. Federal Reserve could deliver faster and larger interest rate hikes in the months ahead.
A day after the Fed flagged that it was ready to start lifting rates in March to contain surging inflation, money markets moved to price in as many as five quarter-point increases by year-end.
The Fed's hawkish tone on Wednesday brought dollar bulls out in force. The dollar index, which measures the greenback's value against other major currencies, rose to 97.299, the highest since July 2020. The 0.8% jump was the biggest single-day gain in more than two months.
The euro slumped 0.95% to $1.1133, its lowest since June 2020. The greenback also hit its highest levels in more than a year against the New Zealand dollar, a seven-week peak against Australia's currency and rose broadly against emerging market currencies.
The Fed indicated it was likely to raise rates in March, as widely expected, and reaffirmed plans to end its bond purchases that month before significantly reducing its asset holdings.
In a follow-up news conference, Chair Jerome Powell stressed that no decisions had been made, but in response to a question about whether the central bank would consider a 50-basis point hike, he did not rule it out.
U.S. gross domestic product increased at a 6.9% annualized rate in the fourth quarter of 2021, and the economy grew 5.7% in 2021, its strongest since 1984, the Commerce Department said. Robust growth supports a rate hike in March.
The outlook for aggressive rate hikes has led to a major reset globally, said Ed Moya, senior market analyst at OANDA.
"You just don't know how far the Fed is going to go because we don’t know exactly when inflation will really peak," he said.
There's optimism inflation will subside by mid-year but it could get worse and lead to more aggressive Fed action. "You got a little bit more left in this dollar move," Moya said.
YUAN HIT
Rising U.S. Treasury yields at the short end provided a further impetus to the dollar's gains. The two-year Treasury yield, which typically moves in step with rate expectations, was up 7.1 basis points at 1.162%.
After rallying 0.7% against the yen on Wednesday in its sharpest rise in more than two months, the dollar firmed further, leading the yen to weaken 0.63% to 115.38 per dollar.