Dollar falls as markets increase bets on more Fed easing

[September 16, 2020]  By Julien Ponthus

LONDON (Reuters) - The U.S. dollar fell across the board on Wednesday as expectations grew that the U.S. central bank may hint at more policy action, while the Chinese yuan vaulted to its highest level since May 2019.

The Federal Reserve's decision is due at 1800 GMT. 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.

The U.S. central bank on Aug. 27 made a landmark shift in its approach to monetary policy and now aims for 2% inflation on average, meaning periods of low price increases could be followed by inflation rising moderately above 2%.

The change suggests the U.S. central bank's key overnight interest rate, already near zero, will stay there for potentially years to come as policymakers woo higher inflation.

The dollar index <=USD> fell 0.3% at 92.836.

Given the scale of the policy change involved, investors tend to stay on their toes prior to any Fed announcement.

"The dollar got sold on last 3 FOMC (Federal Open Market Committee) days so we continue with that pattern today", noted Kenneth Broux, a strategist at Societe Generale.

Trading could, however, easily and quickly shift soon after the statement, Commerzbank foreign exchange analyst Antje Praefcke warned.

A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

In the meantime, most currencies made steady gains against the greenback.

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 <CNH=D3>, which is on track for four straight months of gains, notched a fresh 16-month high, hitting 6.7536 per dollar.

"People are starting to embrace a new theme, which is that China is managing much, much better than anyone else," said Davis Hall, head of capital markets in Asia at Indosuez Wealth Management.

The Japanese yen <JPY=> also made significant gains during the session and touched levels not seen since the end of July, briefly going under 105 per dollar.

The euro <EUR=> rose 0.27% to $1.1852.

Sterling reversed earlier losses and rose 0.6% to $1.2995 in what would be its biggest daily rise in 2-1/2 weeks before a meeting of the Bank of England on Thursday, when policymakers may strike a downbeat assessment for the struggling economy.

The dollar also lost 0.67% against Norway's krone <NOK=> as rising oil prices helped prop up the currency.

(Reporting by Julien Ponthus; Editing by Hugh Lawson and Steve Orlofsky)

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