Dollar hits three-month lows amid Fed easing speculation

LONDON (Reuters) – The dollar dropped to a three-month low amid speculation the U.S. Federal Reserve will announce later on Wednesday it intends to keep a recent rise in bond yields in check.

Concern about possible measures or even a simple statement of intent by the Fed to hold down the yields of U.S. government bonds has kept the U.S. currency under pressure.

Against a basket of international currencies =USD, the dollar fell about 0.5% to 95.97, a level not seen since March 12. The euro EUR=D3, the pound GBP=D3 and the Swiss franc CHF=D3 all reached three-month highs against the dollar.

The euro rose as high as $1.1388, sterling reached $1.2786 and the franc $0.9449.

Dollar/yen fell to nearly a two-week low of 107.26 JPY=EBS.

Some investors believe the Fed, which is not expected to change its interest rate policy, may decide either today or at a later date to adopt yield-curve control measures to guide 10-year Treasury yields lower.

Earlier this month, hopes that the U.S. economy would recover faster than expected had pushed yields of U.S. government bonds to their highest level in nearly three months and strengthened the dollar.

“We do not expect yield curve control to be adopted at tonight’s meeting, but we would not be surprised if markets this evening are left with a view that it is a policy under most serious consideration as a strong, powerful form of forward guidance and is likely to be introduced later in the year”, MUFG Bank analysts wrote to their clients.

In the meantime, the uncertainty about the outcome of the Fed meeting is likely to keep the dollar under pressure.

“Anyone who wants to know what that means for the U.S. dollar long term simply has to take a look at the JPY (yen) and how it acts as the ultimate safe haven in times of crisis – more so than even the dollar”, Commerzbank analyst Thu Lan Nguyen commented.

U.S. central bankers on Wednesday will also publish their first economic projections since the coronavirus pandemic plunged the country into recession.

Estimates are expected to signal a collapse in output this year and near-zero interest rates for the next few years.

The Australian and New Zealand dollars extended their recent rally against the U.S. dollar as economic activity in both countries resumed following the lifting of coronavirus restrictions.

The Australian dollar AUD=D3 rose 0.69% to $0.7008, just shy of an 11-month high. The New Zealand dollar NZD=D3 also rose 0.7% towards its highest since late January.

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