* Dollar index sheds 0.5% after FOMC
* Fed sees faster economic recovery but no rate hike through 2023
* Bond yields stuck near 13-month high
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Hideyuki Sano
TOKYO, March 18 (Reuters) - The U.S. dollar was on the defensive on Thursday after the Federal Reserve signalled it was in no hurry to raise interest rates through all of 2023 even as it saw a V-shaped recovery in the world's largest economy.
Investors dumped the dollar and rushed to more risk-sensitive currencies as Fed Chairman Jerome Powell, true to his dovish credentials, dampened speculation a stronger economic outlook could propel the central bank to wind back its stimulus.
"It was the usual Jay after all," said Bart Wakabayashi, Tokyo Branch Manager of State Street Bank.
"Markets have been thinking the Fed will raise rates perhaps once next year and a couple of more times in 2023... There will remain questions over whether the Fed can control inflation."
The dollar index dropped 0.5% to its lowest levels in two weeks and last stood at 91.400.
The U.S. central bank now sees the economy growing 6.5% this year, which would be the largest annual jump in gross domestic product since 1984 and a whopping 2.3 percentage points upgrade from its projection just three months ago.
Inflation is now expected to exceed the Fed's 2% target to 2.4% this year, though Fed officials think it will move back to around 2% in subsequent years, thus allowing them to keep interest rates at current low levels.
The Fed's so-called "dot plots" put policymakers' median projection of interest rates at zero percent in 2023, even though seven of 18 officials now expect higher rates in 2023, compared to five in December.
The dollar slipped to 108.87 yen, off Monday's nine-month top of 109.365 while the euro rose to $1.1980, edging near last week's high of $1.1990.
The 10-year U.S. Treasuries yield gyrated wildly before settling around 1.648% for now, having hit an 13-month high just before the Fed's announcement.
Traders, however, see potential for further market volatility.
"While our view remains that movements in yields through the latter part of February and into March have been akin to a ‘taper-less tantrum’, there is potential for further market volatility, perhaps around 'data tantrums' over the coming months," wrote Gurpreet Gill, macro strategist at Goldman Sachs Asset Management in London.
The British pound traded at $1.3970, having gained about 0.5% overnight.