The U.S. dollar steadied on Thursday after suffering its biggest daily plunge since 1985, while Asian government bonds rallied on a large-scale plan by the Federal Reserve to buy long-dated U.S. Treasuries, reviving a practice not used in decades.

Banks once again led Asian stocks higher on hopes for an improvement in the global financial sector and European equities opened higher after two sessions in a row of losses.

The Fed surprised investors on Wednesday by announcing it would buy $300 billion in U.S. Treasuries -- its first sizeable purchases of the debt since the early 1960s.

These efforts are part of Fed's intention to inject an additional $1 trillion into the ailing U.S. economy by also purchasing more U.S. mortgage and agency debt.

But analysts said the sharp expansion of the Fed's balance sheet could spew dollars into global markets and lead to an oversupply of the world's main reserve currency.

The actions also sparked concerns other central banks would follow suit, creating a domino effect of weakening currencies.

Central banks in Britain and Japan have already announced they would purchase their respective government debt, while the Swiss National Bank last week said outright it would sell francs to weaken its currency.

Soon the entire G7 might have near-zero rates and have implemented quantitative easing in some shape or form, which makes it hard to pick a currency winner, RBS analysts said in a note to clients.

Even so, the backlash against the U.S. dollar could last for some days and the downward pressure on the U.S. dollar will intensify if quantitative easing sustains the recovery in equities.

The announcement -- following a policy meeting that kept U.S. interest rates at nearly zero -- effectively seeks to print money to revive an economy in a practice known as quantitative easing.

The move to purchase longer-dated U.S. government debt, on top of regular purchases of short-term Treasury bills, is intended to feed into the U.S. economy via lower credit costs for consumers and businesses.

The dollar index <.DXY>, a gauge of its performance against a basket of major currencies, rose 0.2 percent to 84.324. But that came after a 3 percent slide on Wednesday that was its biggest one-day drop since 1985.

The euro initially extended its gains, hitting a two-month high of $1.3536 on trading platform EBS, after jumping 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.

But the euro later trimmed its gains and was down 0.1 percent from late U.S. trading on Wednesday at $1.3462.

Analysts still expect the dollar to be hit, however.

I think the dollar will continue to be sold across the board for the time being, over the next week or so, said Motonari Ogawa, a director at Barclays Bank in Tokyo.

In bond markets, U.S. Treasury yields remained sharply lower in Asia on Thursday, after plunging in the previous session by the most since the day after the U.S. stock market crash in 1987.

The yield on the benchmark 10-year note collapsed as far as 2.49 percent on Wednesday from just above 3.00 percent the day before, and was holding at 2.544 percent in Asian trade.

In Japan, government bonds also gained, pushing yields down across most of the curve. The country's central bank had said on Wednesday it would increase its buying of government bonds by nearly a third to help cushion the economy.

June futures jumped 0.72 point on the day to 139.57, while the benchmark 10-year yield fell 4.5 basis points to a three-week low of 1.255 percent.

Asia-Pacific stocks rallied, led by banks such as Woori Finance Holdings <053000.KS> and Commonwealth Bank of Australia amid hopes of an improvement in the global financial system and the prospects that an improved U.S. economy would bolster global trade.

The MSCI Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> climbed 1.7 percent after earlier hitting their highest level since mid-February, though the Nikkei average lost 0.3 percent.

Gold was trading at $931.95 per ounce, succumbing to profit-taking from New York's notional close of $940.00 on Wednesday.

Prices for the yellow metal had surged in the previous session on concerns about the potential inflationary effects from the Fed's efforts.

Oil reversed earlier losses, to gain 81 cents to $48.95 a barrel.

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