LONDON- The U.S. dollar fell on Wednesday ahead of the Federal Reserve's economic projections, and as optimism that the global economy is recovering reduced demand for the currency.
The Fed's projections will be watched for any new indications on when the U.S. central bank may lift rates from zero bound. Any details on its new inflation targeting policy and a possible shift towards buying more longer-dated Treasuries as part of its quantitative easing program are also in focus.
The Fed, however, may be running out of new ways to ease monetary conditions after Fed Chairman Jerome Powell last month announced a new inflation policy, which would allow price pressures to run higher than previously before raising rates.
"I think the bar for a dovish surprise is quite high at this point, partly because the toolkit is somewhat limited," said Vassili Serebriakov, an FX strategist at UBS in New York.
The dollar index against a basket of currencies fell 0.21% to 92.92.
Stronger Chinese data for August and optimism about a vaccine for the coronavirus helped boost risk sentiment this week, and reduced demand for the greenback.
"I would say the biggest impulse this week was the stronger activity data for the month of August from China, and maybe a bit of ongoing optimism about the vaccine," Serebriakov said.
Data on Tuesday showed that China's industrial output accelerated the most in eight months in August, while retail sales grew for the first time this year.
"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 offshore yuan gained to 6.7536, the strongest since May 2019.
U.S. data on Wednesday showed consumer spending slowed in August, with a key retail sales gauge unexpectedly declining.
The Japanese yen strengthened as far as 104.70 against the greenback, the strongest since July 31.
Japan's new Prime Minister Yoshihide Suga pledged on Wednesday that he will do his best to protect employment while also countering the coronavirus.
The euro rose 0.05% to $1.1851.
Sterling reversed earlier losses and rose 0.62% to $1.2966 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.
(Additional reporting by Julien Ponthus in London; Editing by Sandra Maler) ((email@example.com))