* Dollar index at highest since July 2020
* Hawkish Fed bolsters greenback
* Yuan set for biggest daily fall since July 2021 (Updates throughout)
By Dhara Ranasinghe
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 inflation, money markets moved to price in as many as five quarter-point increases by year-end.
This backdrop bought dollar bulls out in force -- the dollar index, which measures the greenback's value against other major currencies, rose to 97.120, the highest since July 2020.
The euro slumped 0.75% to $1.1156, 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 on Wednesday 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 figures later on Thursday are expected to show annual growth at its strongest since 1984.
"While the market had already been priced for hikes, a lot of people were assuming that the Fed might be more sensitive to the equity market, which it wasn't," said Jane Foley, head currency strategist at Rabobank. "Also the Fed's mention the balance sheet has focused markets' mind on the withdrawal of stimulus."
Foley added that a shake-out of overly long dollar positions earlier in the month had left the greenback in a position to react to the latest Fed signalling.
Rising U.S. Treasury yields provided a further impetus to the dollar's gains.
After rallying 0.7% against the yen on Wednesday in its sharpest rise in more than two months, the dollar firmed a further 0.5% to 115.20 yen.
The risk-sensitive Australian dollar fell 0.6% to $0.7072, having fallen to as low as $0.7064, while the New Zealand dollar fell to as low as $0.6597, a nearly 15-month trough.
"All in all, we think markets are running away a bit here," said Elsa Lignos, global head of FX strategy at RBC Capital Markets.
Sterling fell to a one-month low at $1.3376 and was last down 0.6% on the day. Britain's pound is delicately balanced as traders keep a wary eye on Prime Minister Boris Johnson, who is under pressure after attending parties during lockdowns, and on next week's Bank of England meeting.
Elsewhere, China's yuan took a hit as data showed Chinese industrial profits grew at their slowest pace in more than 18 months, bolstering the case for policy support.
In offshore trade, the yuan was down 0.7% against the dollar at 6.3642. It was on track for its biggest one-day fall since last July.
After a battering last week, cryptocurrencies have mostly held their ground in the wake of the Fed's meeting, with bitcoin last down 0.4% at $36,673.
(Reporting by Dhara Ranasinghe in London; additional reporting by Tom Westbrook in Singapore; Editing by Alison Williams and Bernadette Baum)