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US DOLLAR INDEX

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Dollar higher after Fed upgrades economic outlook

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09/16/2020 | 03:50pm EDT
FILE PHOTO: FILE PHOTO: U.S. dollar notes are seen in this picture illustration

By Karen Brettell and Sinéad Carew

The U.S. dollar gained on Wednesday in choppy trading after the Federal Reserve kept interest rates pinned near zero and said it expects the U.S. economic recovery from the coronavirus crisis to accelerate with unemployment falling faster than the central bank expected in June.

The U.S. central bank said it would keep rates at rock bottom levels until inflation is on track to "moderately exceed" the U.S. central bank's 2% inflation target "for some time."

In new economic projections, Fed policymakers at the median see economic growth dropping by 3.7% this year, an improvement from the 6.5% drop projected in June.

"The Fed really underscored its dovish stance and how inflation holds the key to the policy outlook. Overall it was very dovish," said Joe Manimbo, senior market analyst at Western Union Business Solutions on Washington.

"But what's keeping a floor under the dollar so far is that the Fed upgraded its economic forecast for GDP for 2020. The new projection is -3.7%. That's not as bad as (the projection) from June," he added.

The dollar index against a basket of currencies <=USD> gained 0.07% to 93.19. The euro fell 0.41% to $1.1797.

Stronger Chinese data for August on Tuesday had weighed on the greenback as investors price for the prospect that other regions will see a faster economic recovery from coronavirus than the U.S.

"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," said Vassili Serebriakov, an FX strategist at UBS in New York.

The Chinese data showed that 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 6.7426, the strongest since May 2019.

The safe-haven Japanese yen hit a two-and-a-half month high of 104.81 against the greenback.

"The main tailwind for the yen is political uncertainty at home. The surprise departure of Abe has put a persistent bid into the yen as Japanese investors pull back on risk," said Adam Button, chief currency analyst at ForexLive in Toronto.

Japan's new Prime Minister Yoshihide Suga pledged on Wednesday that he will do his best to protect employment while also countering the coronavirus.

(Additional reporting by Julien Ponthus in London; Editing by Sandra Maler and Nick Zieminski)

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