By Karen Brettell
NEW YORK, July 29 (Reuters) - The U.S. dollar fell to a two-year low on Wednesday before the Federal Reserve is expected to affirm its commitment to holding rates near zero for years, with investors focused on whether the U.S. central bank will also indicate a higher tolerance for future inflation.
Expectations that the Fed will let inflation run higher than previously expected before raising interest rates has helped send real yields to near-historic lows and is also raising some fears that the dollar’s role as a reserve currency could shrink.
“Forex markets will be laser-focused on whether there is a signal that it will tolerate higher inflation, as this could weigh on real yields, and thereby the dollar, further,” analysts at Action Economics said in a report.
Real 10-year Treasury yields US10YTIP=RR, which reflect returns after expected inflation, have fallen to negative 0.93%.
The dollar has also been held down by a continued rise in coronavirus cases in the United States, even as other parts of the world, including Europe, appear to have contained outbreaks.
“The dollar's outlook remains weak thanks to the diverging trends in coronavirus cases between Europe and the U.S.," said Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank.
U.S. deaths from the novel coronavirus were approaching 150,000 on Wednesday, the highest level in the world and rising by 10,000 in 11 days, according to a Reuters tally.
Against a basket of other currencies =USD the dollar fell 0.26% to 93.51, after earlier dipping to 93.39, its lowest level since June 2018. It has weakened more than 3% since the last Fed meeting as yields on benchmark U.S. Treasury debt have fallen more than 20 basis points since then.
The weakening dollar pushed the Australian dollar higher, with the currency trading at $0.7180 AUD=, hitting a 15-month peak after data showed Australia's consumer prices fell by a record in the second quarter.
The euro traded at $1.1752 EUR=, up 0.32%, although it has stepped back from Monday's 22-month high of $1.17815.
The dollar traded at 105.05 yen JPY=, after earlier falling to a four-month low of 104.81 yen.
Sterling GBP= gained 0.43% to $1.2985, the highest since March.
Elsewhere, the Turkish lira held near record lows after it plunged 2% in minutes on Monday before reversing most of that fall. One-week and one-year Turkish lira implied volatility gauges jumped to their highest level in two months.
Currency bid prices at 9:30AM (1330 GMT)
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(Reporting by Karen Brettell; additional reporting by Saikat Chatterjee in London; editing by Jonathan Oatis)
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