LONDON - The euro trimmed gains against the dollar on Wednesday after the European Central Bank announced it will skew reinvestments of maturing debt to help more indebted members and will devise a new instrument to stop fragmentation.

"The Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism," the ECB said after a rare unscheduled meeting.

The euro had earlier risen from near one-month lows after the central bank announced they would be holding an unscheduled meeting to "discuss the current market conditions".

The single currency was last up 0.17% versus the dollar at $1.0432 having earlier risen as much as 0.7% to $1.0508.

The dollar index, which measures the greenback against major peers including the euro, fell 0.1% to 105.17 ahead of a closely-watched meeting of the Federal Reserve.

The policy meeting is due to conclude later on Wednesday, and markets are pricing in an 87% chance of an outsized 75 bp interest rate hike as policymakers try to rein in rampant inflation.

Expectations picked up following media reports, first by the Wall Street Journal, that a bigger rate increase was on the cards, after data released last week showed the U.S. consumer price index surged 8.6% in the 12 months to May, the largest year-on-year increase in four decades.

The dollar had already been gaining ground in the past few months thanks to the Fed raising rates ahead of most other major central banks and has been given another leg up in recent weeks as investors seek safe havens, fearing the economic impact of rapidly tightening financial conditions.

But with such a large interest rate increase already expected, the dollar may struggle to gain further after the Fed's decision.

"Fed chair Jerome Powell will likely want to keep all options open for himself at tonight's press conference and provide little in the way of news," Commerzbank FX and EM analyst Antje Praefcke said in a note.

"That in turn would not constitute any additional fuel for the dollar bulls as market expectations have already gone a long way."

Higher U.S. rates versus rock bottom Japanese yields have been weighing on the yen, which hit a new 24-year low of 135.60 per dollar in Asia-Pacific trade.

It recovered in the course of the day amid volatility in government bond markets, to as much as 134.33.

Sterling rebounded to as high as $1.2125, after slumping to a 15-month trough versus the dollar at $1.1934 the previous day.

The Australian dollar, often seen as a proxy for risk appetite, was at $0.69345, rising just under 1% from the previous day's one-month low.

The Aussie is down 7.3% so far this quarter, which would be its worst quarter since the first three months of 2020 when the COVID-19 pandemic hit.

Bitcoin, another risk-friendly asset class, was down another 4.5% to $21,138, after earlier hitting its lowest since December 2020, as the fallout from crypto lender Celsius freezing withdrawals continues to shake cryptocurrency markets.

(Reporting by Samuel Indyk in London and Alun John in Hong Kong; Editing by Toby Chopra)