Havens favoured as China jitters persist; dollar waits for Fed

SINGAPORE: The dollar was pinned below recent highs on Wednesday by a decline in real yields and by trepidation ahead of a Federal Reserve meeting, while other safe-haven currencies were in favour following an unnerving plunge in Chinese equity markets.

The Japanese yen, Swiss franc and the euro all held Tuesday's gains throughout the Asia session, with the yen trading at 109.80 per dollar and the euro at $1.1821.

The Chinese yuan edged back from a three-month low, after logging its worst day since October on Tuesday, but the bounce was modest and risk-sensitive Australian and New Zealand dollars also struggled to rally as sentiment remained fragile.

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Hong Kong's Hang Seng Index stabilised after suffering its sharpest one-day selloff in more than a year on Tuesday, when jitters also spilled into US markets.

"The fall in Chinese markets caused a ripple effect to global sentiment and it was a risk-off session," said Westpac strategist Imre Speizer.

The gains by the yen, euro and franc combined to push the US dollar index lower and it sat at 92.466 on Wednesday.

Declining US real yields, which hit another record low at the 10-year tenor overnight, also cast a pall over the dollar and the global economic outlook.

Sterling was an outlier and it jumped through its 20-day moving average overnight as traders took reports that Britain was considering opening borders as a signal of further re-opening benefits to come. It last sat at $1.3874.

Focus turns now to investors' positioning ahead of the Fed meeting.

The dollar has enjoyed a month-long rally after a hawkish shift from the Fed in June and markets are waiting to see whether there are more clues this month on the timing of tapering as policymakers face spiking US inflation.

Hints of a faster end to extraordinary policy support could lift US rates and the dollar, while a dovish-sounding Fed might put pressure on the greenback, analysts said. The Fed publishes a statement at 1800 GMT followed by a news conference from Chair Jerome Powell at 1830 GMT.

"Although I am not expecting any change in the statement's language this time around, the (Fed) surprised me last time so I won't say never say never," said Jeffrey Halley a senior analyst at brokerage OANDA.

"Markets appear to be similarly inclined."