The U.S. dollar plumbed a near 3-year low against other major currencies on Wednesday before a Federal Reserve decision, which is expected to reinforce an ultra-easy policy stance and drive more capital to buoyant emerging Asian stock markets.
While Fed chairman Ben Bernanke is expected to paint a cautious picture on the world's largest economy, Asian and Latin American central banks by contrast are still tightening monetary policy and some are using currency appreciation to check price pressures.
The European Central Bank raised its policy rate this month for the first time since mid-2008 and is expected to raise rates at least once more this year.
That has given new legs to the carry trade, in which investors borrow in a low-yielding currency to invest in higher-yielding assets or currencies.
Investors have been snapping up the high-yielding Australian dollar and South Korean shares <.KS11>, while showing heavy interest in Indonesia's upcoming dollar bond.
Market players also added to bearish dollar bets, especially against the euro and the Swiss Franc, on expectations the Fed will cling to a near-zero interest rate policy even as it lets a $600 billion bond purchase program wind down in June.
Focus will be on the inaugural press conference and whether Bernanke is shifting along the dove-hawk scale, said Michael Sneyd, analyst at Societe Generale.
Attention will also be on comments for how the Fed may respond to U.S. fiscal tightening. All-in-all, the meeting is likely to give the green light for risk appetite and for dollar bears to continue to be bearish.
The dollar index <.DXY>, which tracks its performance against a basket of major currencies, hit the lowest since August 2008 at 73.483, before cutting some losses.
FLOWS PICK UP
Asian shares rose after robust gains posted by U.S. indices overnight, driven by better-than-expected performances from U.S. corporate heavyweights. U.S. stock futures rose 0.1 percent, suggesting a higher open on Wall Street.
South Korea's benchmark KOSPI index <.KSII> rose to a record high for the third consecutive session before giving back some gains as investors took profits on automaker shares. It ended flat. Hong Kong shares <.HSI> rose, boosted by a broad rally in financials ahead of results from Chinese banks.
MSCI's index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> rose to its highest level since January 2008, and was up 0.5 percent on the day.
Japan's Nikkei <.N225> closed up 1.4 percent, supported by rebounding shares of large exporters. But it could face downward pressure after ratings agency Standard & Poor's revised its outlook on Japan's sovereign debt to negative.
Offshore flows into non-developed Asian markets have picked up after a January slump, with both emerging markets equity and bond fund groups extending their longest inflow streaks since mid-January, according to fund tracker EPFR Global.
The order book for Indonesia's eagerly awaited 10-year dollar-denominated bond has grown to around $5 billion for an issue expected to be between $1 billion to $1.5 billion in size, IFR said. Indonesia's markets have been a favorite among global investors because of the country's relatively high yields, decent economic growth and demographics.
China let the yuan rise to a post-2005 revaluation high, triggering gains in emerging Asian currencies.
Helping the case of carry trades, the Australian dollar shot to a new 29-year peak above the $1.0800 per U.S. dollar after higher-than-expected first quarter inflation suggested the central bank will eventually have to resume tightening.
The dollar's woes have been further compounded by a recent drop in U.S. Treasury yields as rate traders bet that any Fed tightening would be a slow and gradual process.
In Asian time, the U.S. 10-year note yield was at 3.32 percent, just above a one-month low of 3.31 percent before the Fed decision. Ten-year yields are down by about 30 basis points since this month's highs.
In commodity markets, spot silver bounced 0.9 percent to around $46 per ounce level after falling by nearly 5 percent overnight. High volatility and the expiry of U.S. silver options added to the intensity of the decline of the precious metal.
Despite the sharp pullback in silver which rippled over into other commodities, Brent held above the $124 per barrel line, as Libya's civil war and violence-tinged unrest Syria and Yemen helped limit bearish sentiment on a price slide.