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The Fed begins a two-day meeting on Tuesday and analysts expect the U.S. central bank to affirm its current zero-interest-rate policy over the next three years.
“There’s a possible dovish risk to the Fed meeting,” said Edward Moya, senior market analyst, at OANDA in New York. “And you’ll probably find the dollar vulnerable leading up to the Fed announcement.”
In late morning trading, the dollar fell 0.3% against the yen to 105.42, after earlier sliding to a two-week low of 105.30 yen.
A break below 105.20 yen could pave the way for further technical selling, analysts said.
“The U.S. central bank will be wary of uncertainty the U.S. presidential election will bring with it and wouldn’t want to cause unnecessary turmoil in the financial markets,” said Fawad Razaqzada, market analyst, at ThinkMarkets.com in London.
The dollar index was slightly up on the day at 93.111, as the greenback recovered somewhat after the euro reversed earlier gains.
The euro was last down 0.2% at $1.1844.
Earlier, the euro gained after the ZEW economic sentiment survey showed investor sentiment in Germany rose in September, despite headwinds from Brexit and rising coronavirus infections.
The euro along with commodity-linked currencies such the Australian, New Zealand, and Canadian dollars gained after positive Chinese data overnight.
China’s industrial output accelerated and retail sales grew for the first time this year, beating analysts’ forecasts.
That pushed the Chinese yuan to its highest since May 2019 against the dollar, which was last down 0.4% at 6.7808 yuan in the offshore market.
“China is an economic winner at this point in the pandemic,” said Kit Juckes, head of FX strategy at Societe Generale. “There’s a sense that the virus is less of a threat in China now, and also perhaps more widely the market is looking for a more V-shaped global economic recovery.”
The Australian dollar also rose after minutes of its central bank meeting showed no signs of a further cut to record-low interest rates.
U.S. stocks were also higher on the day.
The positive sentiment in currency markets was also attributed to hopes for a COVID-19 vaccine.
British drugmaker AstraZeneca restarted its vaccine trial in Britain on Saturday though it remains on hold in the United States.