At the same time, the world's most important central bank also normalized money printing - a policy instrument that nearly a decade ago was introduced as an extraordinary, emergency, one-off response to the huge credit crunch that threatened to engulf the world economy.
That undid all of the damage done to the greenback earlier in the day and pushed it higher as European traders got down to business on Thursday.
"I would think that at some point the market is going to be pricing in even greater risks that the Fed might be moving too quickly", said Mark Cabana, head of USA short rates strategy at Bank of America Merrill Lynch in NY.
The final May results of 1.9% year-on-year and -0.1% month-on-month caused investors to worry that US inflation would not be able to support a third US interest rate in 2017 and the US Dollar dropped.
Consumer prices unexpectedly fell on month in May and the annual increase in core CPI slipped to 1.7 per cent, the smallest rise since May 2015, after advancing 1.9 per cent in April.
The Australian dollar rose 0.2 percent to $0.7599, moving back toward its 2-1/2-month high of $0.7636 hit on Wednesday, after a better-than-forecast employment report. Global currency volatility approaches the record lows seen during the summer of 2014 and with major central banks on hold, it may take a black swan event to unfold for it to rebound convincingly.
Investors appear more concerned about Eurozone inflation.
The dollar was steady on Wednesday, reversing major early losses, after the Federal Reserve raised USA overnight interest rates and said it was prepared to continue tightening monetary policy.
On the macroeconomic front, NY Empire State manufacturing, initial jobless claims, the import and export price indices and the Philadelphia Fed manufacturing survey are at 1330 BST.
As expected, the Fed hiked USA interest rates - the second interest rate so far this year.
Indeed, the flattening of the yield curve, a line that traces yields across maturities, over the course of the week indicates that "the market and the Fed are not on the same page", said Ward McCarthy, chief financial economist at Jefferies, in a note to clients.
Meanwhile, USD/CAD advanced 0.32% to trade at 1.3287, pulling further away from the previous session's more than three-month low of 1.3163. Chair Janet Yellen said they were monitoring inflation developments closely. Following this week's unexpectedly slow USA inflation report the Fed also downgraded its 2017 inflation outlook.
The Fed hiked its benchmark overnight interest rate by 25 basis points to range of 1.00 percent to 1.25 percent, and said it would start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities this year. Spot gold fell 0.2 percent at $1,263.03 an ounce.
The dollar fell to a seven-month low against a basket of currencies on the data, before retracing some of the losses. Wellington and Taipei also saw healthy gains but Shanghai ended off 0.3 percent.