FOREX-Yen hits two-week high on dovish Fed expectations; yuan rallies

Reuters

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    * Yen creeps to two-week high on dovish Fed bet
    * Policy decision due at 1800 GMT
    * Yuan extends gains one day after upbeat data
    * Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

    By Tom Westbrook
    SINGAPORE, Sept 16 (Reuters) - The Japanese yen inched
higher on Wednesday as traders bet an ultra-accommodative U.S.
Federal Reserve would weigh on the U.S. dollar, while the
Chinese yuan extended gains one day after data pointed to better
prospects for the world's No. 2 economy.
    The Fed is due to make its first policy statement since
adopting a more tolerant approach to inflation later on
Wednesday.
    Traders bought yen on the belief the U.S. central bank may 
promise further stimulus, which would likely weaken the U.S.
dollar and push Treasury yields lower. The Fed is not expected
to move on rates but adjustments to bond purchases are possible.
    The yen  JPY=  touched a two-week high of 105.25 per dollar,
but investors reduced dollar shorts, or bets that the dollar
would fall, after months of weakness in the greenback.
    Against other majors, the dollar drifted lower or held
steady -- last trading 0.1% softer against a basket of
currencies  =USD  and a tad weaker on the Aussie and kiwi.
    "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 U.S. bond market
given Japanese investors are large buyers of U.S. debt.
    "You can brace yourself for some choppy price action around
the announcement, but when the dust settles you would think that
we'll be seeing a Fed that's leaning towards looser policy to
match what they've already announced," Callow said.
    Through the Asia session, the yen rose 0.2%. The Australian
dollar  AUD=D3  rose by the same margin to $0.7317 and the New
Zealand dollar  NZD=D3  edged higher to $0.6727.
    The euro  EUR=  was steady at $1.1847 and sterling  GBP= 
crept higher to $1.2914 on hopes that a British plan to break
its Brexit treaty will not come to fruition.
    The Fed decision is due at 1800 GMT followed by a news
conference from chairman Jerome Powell half an hour later.
    Besides immediate policy, a major focus will be on the Fed's
economic projections, especially if it spells out where it sees 
inflation headed and what exactly that means for rates under its
new regime.  urn:newsml:reuters.com:*:nL1N2GB1K7
    Paucity of detail could lift the dollar a little, though
analysts felt that would probably be short-lived.
    "The market overall knows that the Fed wants to be dovish.
It's just that the timing may not match what the market wants in
terms of giving details in this meeting," said Bank of Singapore
FX analyst Moh Siong Sim.
    
    RUNAWAY YUAN
    Beyond Fed positioning a soaring yuan was the other driver
of trade in Asia on Wednesday.  CNY/ 
    In offshore trade, the Chinese currency  CNH=D3  made a
fresh 16-month high, hitting 6.7652 per dollar as it extended a
decisive leap in the wake of strong retail sales and industrial
output data on Tuesday.
    That pulled the South Korean won  KRW=  to a 7-month high
and the Malaysian ringgit  MYR=  to its highest since February.
 EMRG/FRX 
    The strongest fixing of the yuan's onshore midpoint
 CNY=PBOC  since May 2019 was also seen as signal that
policymakers don't mind a strong currency amid a broader policy
shift towards growing China's domestic economy.  urn:newsml:reuters.com:*:nL4N2G025D
    The yuan has risen more than 5% over the past four months.
    "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 said.
    "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," he said. "They
can live now, with a stronger currency, with much less need to
devalue."

 (Reporting by Tom Westbrook; editing by Richard Pullin and Ana
Nicolaci da Costa)
 ((tom.westbrook@tr.com; +65 6318 4876;))

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