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FOREX-U.S. stimulus hopes push dollar to one-month low; risk currencies gain

·3-min read

* Dollar index falls after Trump's pro-stimulus comments

* Yuan surges after firmer central bank guidance

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

LONDON, Oct 21 (Reuters) - The dollar fell to a one-month low on Wednesday after U.S. President Donald Trump boosted hopes for a large fiscal stimulus package, prompting a wave of market optimism that saw traders ramp up their bets on riskier currencies.

Lawmakers in Washington have been negotiating intermittently since August, with Democrats arguing for a bigger package to help manage the economic fallout from coronavirus.

Trump raised hopes for a breakthrough on Tuesday by saying he was willing to accept a large aid bill, despite opposition from his own Republican party. The comments sparked some risk-on moves in currency markets.

"All in all, the chances of a stimulus bill being passed still look rather thin and we doubt investors have high expectations in these terms," ING strategists wrote in a note to clients.

But a collapse in negotiations would not do serious damage, they said, because investors still expect stimulus to be passed after the U.S. elections, in the case of a Democrat victory.

"For now, the fact that the perceived probability of a bi-partisan deal is increasing rather than decreasing may be just enough to put a floor below risk assets and high-beta FX, and USD could stay gently offered across the board," they said.

"This story may well remain the dominant driver for markets for the rest of this week as both parties aim to reach a potential deal by the weekend," they said.

At 0710 GMT, the dollar was down 0.3% against a basket of currencies, at 92.801.

The riskier New Zealand and Australian dollars both advanced, with the Kiwi up 0.6% and the Aussie up 0.5% .

The Norwegian crown reached a one-week high of 9.196 versus the U.S. dollar, and the Canadian dollar rose to its strongest in more than six weeks, touching 1.3081 per dollar .

The euro rose to a one-month high versus the dollar in early trading and was up 0.3% at $1.18555 at 0723 GMT.

China's yuan surged, in both offshore and onshore trading, led by firmer central bank guidance and recent data suggesting a more sustained recovery in the world's second-largest economy.

The offshore yuan reached its strongest in two years versus the U.S. dollar towards the end of the Asian session at 6.6278 before easing somewhat. By 0725 GMT, it was up 0.4% at 6.6374 .

"There are few US-China headlines recently which has somehow encouraged the optimism towards the Chinese currency," wrote Commerzbank FX and EM analyst Hao Zhou.

"For the short term, the momentum trading is likely to dominate, if there is no clear setback from either economic and geopolitical front. However, past lessons suggest that the geopolitical tensions will come back at some point," he said. (Reporting by Elizabeth Howcroft, editing by Larry King)