June 10, 2020 / 6:14 AM / a month ago

FOREX-Dollar falls as nerves set in before Fed policy decision

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

* Fed meets as traders eye Treasury yields

* Optimism about economic recovery may be excessive

* Australian, New Zealand dollars resume recent rally

By Stanley White

TOKYO, June 10 (Reuters) - The dollar fell against most currencies on Wednesday amid some speculation the U.S. Federal Reserve could take steps to curb a recent rise in bond yields in a policy decision later in the day.

The Australian and New Zealand dollars extended their recent rally against the greenback as investors continue to cheer a resumption of economic activity in both countries following the lifting of coronavirus restrictions.

The main focus is a Fed policy meeting later on Wednesday. While no major changes are expected, recent rises in yields have pushed up the dollar due to increasing signs that the U.S. economy is slowly rebounding from the health crisis shock, though a full-fledged recovery is still distant.

Some analysts are playing down the chance the Fed will adopt yield curve control to guide 10-year Treasury yields lower, but uncertainty about the outcome of the Fed meeting could keep the dollar under pressure.

“The Fed can afford to wait and see on yield curve control because the U.S. economy has gotten past the crisis phase and only just entered the healing phase,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

“The markets got overly optimistic and are adjusting lower, but this is a good chance to buy the dollar on the dip.”

The dollar fell to 107.54 yen on Wednesday following a 0.6% decline in the previous session.

Against the British pound, the greenback fell to $1.2760, the lowest since March 12.

The dollar also fell slightly to 0.9495 Swiss franc , approaching the lowest since mid March.

The yield on benchmark 10-year Treasury notes was little changed at 0.8271% on Wednesday. Long-term Treasury yields fell on Tuesday and the yield curve flattened slightly as traders adjusted positions before the Fed meeting.

U.S. central bankers on Wednesday will also publish their first economic projections since the coronavirus pandemic plunged the country into recession.

Estimates are expected to signal a collapse in output this year and near-zero interest rates for the next few years.

The euro rose 0.22% to $1.1364. Against the pound, the common currency bought 88.99 pence.

Concerns about progress in trade talks between Britain and the European Union continue to hamper both the euro and the pound.

The EU’s chief Brexit negotiator, Michel Barnier, is scheduled to speak later on Wednesday, which may yield details that will help determine whether market sentiment will improve.

The Australian dollar rose 0.5% to $0.6995, approaching an 11-month. The New Zealand dollar also rose toward its highest since late January.

The Antipodean currencies have been on a stellar run against the greenback due to hopes for economic recovery, prompting some investors to book profits.

Some traders are worried about a deterioration in diplomatic relations between Australia and China, which has capped gains in the Aussie.

Elsewhere in Asia, the Chinese yuan rose to the highest in a month and a half, as traders jockeyed for position before the Fed meeting. (Reporting by Stanley White; Editing by Sam Holmes, Stephen Coates and Kim Coghill)

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