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US dollar falls as markets bet on more Fed easing

London

THE US dollar fell across the board on Wednesday as expectations that the US central bank may hint at more policy action grew, while the Chinese yuan vaulted to its highest level since May 2019.

The Fed decision is due at 2am Thursday, Singapore time.

Markets are keen to see the Fed's economic projections, and particularly whether it spells out where it sees inflation headed and what exactly that means for interest rates.

"The Fed may follow up by announcing some new easing steps in accordance with its new regime though the general market consensus seems to be that it will adopt a wait-and-watch approach," said Lee Hardman, a strategist at MUFG in London.

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Commerzbank foreign exchange analyst Antje Praefcke argued that while prudence in trading the US dollar was expected to prevail ahead of the Fed's statement, investors may change their minds soon after.

Elsewhere, investors were bullish on China with the prospects for the world's No 2 economy improving on the back of strong retail sales and industrial output data.

In offshore trade, the Chinese currency, which is on track for four straight months of gains, notched a fresh 16-month high, hitting 6.7614 per dollar.

"The Chinese currency is, for me, the surprise of the year since May," said Davis Hall, head of capital markets in Asia at Indosuez Wealth Management.

"People are starting to embrace a new theme, which is that China is managing much, much better than anyone else," he noted, adding: "China, effectively, while they move their business model towards an internal demand story, wants to have a stronger currency to reduce their commodity import bill. They can live now, with a stronger currency, with much less need to devalue."

The Japanese yen also made significant gains during the session and touched a two-week high of 105.20 per dollar.

"Dollar/yen is one of the more attractive ways to play for a dovish Fed," said Westpac currency analyst Sean Callow, adding that the yen was particularly sensitive to the US bond market, given that Japanese investors are large buyers of US debt.

The euro rose 0.18 per cent to US$1.1852 and sterling crept 0.12 per cent higher to US$1.2895 amid continuing uncertainty over its plans to break its Brexit treaty. REUTERS

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