· China stocks fall, prompting investors to cut yen shorts
· Fed expected to let bond buying prgramme expire
The Shanghai Composite Index fell as much as 3.1 percent on the day due partly to waning investor confidence in the market after a heated rally of more than 90 percent since the start of the year peaked at a 14-month high last week.
Falling Chinese stocks dented demand for riskier currencies and prompted investors to cut long positions in higher-yielding currencies such as the Australian dollar.
Uncertainty about the overall market reaction to the Fed’s policy decision later on Wednesday also made investors cautious about keeping big positions, traders said.
“The currency reaction after the Fed is hard to predict. But one thing that is certain is that long positions that had been stretched are now looking vulnerable to liquidation,” said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank.
The dollar fell 0.5 percent to 95.55 yen, compared with 95.92 yen late in New York on Tuesday when it dropped more than 1 percent.
Traders also said the dollar’s jump to an eight-week high near 98 yen late last week following better-than-expected U.S. employment data was over done, and investors were now cutting dollar long positions versus the yen.
“The recovery story has been pushed hard, very hard, and it makes sense to see this momentum unwind a little,” said Adam Carr, senior economist at ICAP, Sydney.
“Particularly when there are plenty of equity analysts running around arguing strong moves to date don’t reflect fundamentals.”
The euro slid 0.5 percent to 135.17 and the Australian dollar dropped 0.9 percent to 78.80 yen.
The Australian dollar fell 0.6 percent to $0.8246, while the euro was steady at $1.4143.
The Fed will conclude its two-day policy meeting and release a statement around 1815 GMT, with investors looking to its assessment of the economy and whether it unwinds some of the unconventional easing measures currently in place.
There is mounting speculation it might grow more optimistic about a recovery after a better-than-expected jobs report for July. There is talk it may start putting in place strategies to withdraw some of its extraordinary stimulus with investors looking for the first interest rate hike in March.
But any downside surprise, like from the Bank of England last week, could negatively impact the greenback.
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