Asian shares rallied on Thursday as speculation the US Federal Reserve might opt to not raise interest rates at all this year hammered the dollar and sparked a huge rally in oil prices.

By some measures the US currency suffered its largest one-day per centage drop outside of the crises of 1998 and 2008, symptomatic of just how crowded bullish positions had been.

The sudden reversal provided a much-needed boost to beleaguered commodities, sending oil up no less than 8 per cent, and easing pressure on energy shares and risk appetite.

That relief showed in equity markets where MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.9 per cent. Australia's resource-heavy index rose 1.7 per cent and South Korea 1 per cent.

In China, the Shanghai Composite Index gained 1.8 per cent as trade wound down ahead of the Lunar holidays. Hong Kong stocks leaped 1.7 per cent, in part because the US dollar's fall lessened strains on the HK dollar's peg.

Japanese investors, however, seemed less happy with the yen's newfound strength against the dollar and nudged the Nikkei down 0.7 per cent.

Wall Street had taken its cue from oil and recouped early losses on Wednesday, in a wild session that saw the Dow swing in a 420-point range.

The Dow ended Wednesday up 1.13 per cent, while the S&P 500 added 0.5 per cent and the Nasdaq Composite eased 0.28 per cent.

Traders were unsure what triggered the dollar rout though many pointed to comments from Federal Reserve Bank of New York President William Dudley that tighter financial conditions would be taken into account at the next policy meeting in March.

In an interview with Market News International, Dudley also warned that a sharp rise in the dollar could have "significant consequences" for the US economy.

Investors took that to mean the Fed did not want to see the currency rise any further and might delay further increases in interest rates. Futures markets had already priced out almost any chance of a hike in March and imply a funds rate of just 0.51 per cent by December <0#FF:>.

The current effective funds rate is 0.38 per cent.

The impact was amplified by a surprisingly soft reading on the US services sector, just the latest in a string of disappointing economic indicators.

The market reaction was swift and violent with the dollar collapsing through a host of key chart levels and triggering waves of stop-loss selling.

Early Thursday, the dollar was down at 118.02 yen having shed 1.7 per cent overnight in its biggest daily drop since August.

The fall wiped out all the gains from the Bank of Japan's decision to cut its rates below zero, a tit-for-tat response that only added to market suspicions central banks were engaged in a war of competitive depreciations.

Against a basket of currencies, the dollar was pinned at 97.351, after shedding 1.6 per cent on Wednesday. The euro was enjoying the view at $1.1085, having climbed 1.7 per cent on Wednesday.

The drop was a boon to commodities priced in US dollars, lifting everything from copper to gold to oil.

Brent futures put on another 30 cents to $35.34 a barrel, on top of a 8.4 per cent gain overnight. US crude added 36 cents to reach $32.64.

Spot gold was up at $1,141.00 an ounce and near its strongest since Oct. 30. – Reuters