LONDON (Dow Jones)--Fears that the Federal Reserve will submit a dovish assessment of the U.S. economy is pushing the dollar and the yen higher in Europe Wednesday.
The rise in risk aversion, which is driving global equities lower, is also helping to undermine the euro and the pound.
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Much of the negative sentiment was coming from China, where the Shanghai Composite Index fell a sharp 4.7% on the day after the country admitted that domestic growth may not be able to take up the slack of falling exports.
This is expected to add to pressure on the Fed to take a more cautious line on the economic recovery - reversing some of the optimism that was fueled by last Friday's strong U.S. non-farm payrolls data.
Even before the Chinese news, the Dow Jones Industrial Average had lost 1.0% and the Nikkei had started its 1.4% slide on the day.
The gloom was sustained by European equities with most markets losing up to 0.5%.
The dollar is not only benefiting from the rise in risk aversion but also from the latest evidence that foreign interest in the U.S. remains strong. An auction of three-year Treasury bills Tuesday not only attracted a very strong 2.89 bid-to-cover ratio but a higher-than-usual 62% of the total largely went to overseas central banks.
Another auction of 10-year bonds is due to take place shortly before the results of the Federal Open Market Committee meeting are announced at 1815 GMT.
Attention is also focused on the details of the Bank of England's latest Inflation Report. There is widespread concern that the central bank will play down recent evidence of an economic recovery to help justify its decision to extend quantitative easing last week.
The pound was already under pressure after the latest U.K. employment numbers Wednesday showed a larger-than-expected rise in the number of jobless, which implies a downside risk for consumption.
By 0915 GMT, the dollar had fallen to Y95.67 from Y95.93 late Tuesday in New York, according to EBS.
The euro was down at $1.4130 from $1.4154 and to Y135.20 from Y135.74. The dollar was down at CHF1.0809 from CHF1.0816, while the pound had dropped to $1.6455 from $1.6478.
In Eastern Europe, the euro is mostly higher, rising to HUF274.78 from HUF272.36, to PLN4.2084 from PLN4.1754 and to CZK25.837 from CZK25.793.
-By Nicholas Hastings, Dow Jones Newswires; 44 20 7842 9493; nick.hastings@dowjones.com
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