(Reuters) - The Australian dollar jumped on Wednesday after comments from a senior Chinese official boosted hopes for more stimulus, while the U.S. dollar traded near a five-year high against the yen with markets expecting the Federal Reserve to lift interest rates for the first time in three years.
The Aussie added 0.34% to $0.7223, putting some distance from Tuesday's trough at $0.71650, which was the lowest level this month, after Xinhua news agency cited Vice Premier Liu He said China will roll out policy steps favourable for its capital markets.
"Australia and China have a very strong economic relationship, so the Australian dollar is always going to move on China news," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
"Beyond just China, it's very easy for Aussie to rise on any positive developments for commodities right now."
The U.S. dollar lost 0.30% to 6.3629 yuan in the offshore market, which would be its steepest daily drop in a month.
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The greenback stood at 118.305 yen, little changed from Tuesday when it reached 118.450 yen for the first time since January 2017.
The U.S. currency got support from a leap in long-term U.S. Treasury yields to a more than two-year peak ahead of the Fed decision, while the yen has also been undermined by surging prices for oil and other commodities, weakening Japan's terms of trade.
Money markets are fully priced for a first interest rate hike in three years, and give 13% odds of a half-percentage point increase.
Meanwhile, hopes of some breakthrough in Russia-Ukraine negotiations to end the conflict saw the euro extend its recovery from a plunge to a nearly 22-month low earlier this month.
That helped keep the dollar index - which measures the greenback against six peers, with the euro the most heavily weighted - stuck below 99, from as high as 99.415 at the start of last week. The index last stood at 98.853, down 0.08% from Tuesday.
"Whether it's forlorn or otherwise, there does seem to be some enduring optimism (coming from) the fact that Russia and Ukraine are still talking," helping the euro to stabilise, said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY).
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For the greenback, "the bigger question will be that there is a lot of historical evidence that the dollar peaks as soon as the Fed commences the tightening cycle, so there's a lot of interest in whether what the Fed does turn out to be something of a watershed in terms of a peak," with the dollar index topping out around 100, Attrill said.
The euro added 0.17% to $1.09710, from a trough of $1.08060 on March 7.
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Sterling rose 0.08% to $1.3053, ticking up from a 16-month bottom of $1.3000 in the previous session, with the Bank of England announcing its policy decision on Thursday, and widely seen hiking rates by another quarter-point.
"With the UK more exposed to the Russian supply shock than the U.S., we think the risks lie with disappointment by the BoE and a weaker GBP down to $1.2894," Commonwealth Bank of Australia (OTC:CMWAY) analyst Kristina Clifton wrote in a client note.
The Bank of Japan is expected to leave ultra-loose policy settings in place when reviews its policy on Friday.