U.S. Dollar Falls On Improved Sentiment, Dovish Fed

The U.S. dollar declined against its major counterparts in the Asian session on Tuesday, as investors digested a policy shift announcement by the Federal Reserve and strong China data supported risk sentiment.

Survey from Caixin showed that China's manufacturing activity expanded in August at the fastest pace since January 2011.

The manufacturing Purchasing Managers' Index rose to 53.1 from 52.8 in July.

Last week, the Fed introduced "average inflation targeting," a new policy shift to keep interest rates lower for long periods.

Under the new strategy, the US central bank would tolerate higher inflation before raising rates.

Federal Reserve Vice Chairman Richard Clarida on Monday said that rates will not be hiked just because the jobless rate is coming down.

Investors await August's U.S. manufacturing activity data, due to be released later in the day.

The greenback depreciated to a 2-year low of 0.7414 against the aussie, more than a 1-year low of 0.6766 against the kiwi and near an 8-month low of 1.3002 against the loonie, off its early highs of 0.7368, 0.6727 and 1.3047, respectively. The next possible support for the greenback is seen around 0.77 against the aussie, 0.70 against the kiwi and 1.28 against the loonie.

The greenback edged lower to 0.9005 against the franc, from a high of 0.9045 seen at 8:45 pm ET. If the greenback slides further, 0.88 is likely seen as its next support level.

The greenback slid to 1.3419 against the pound, a level not seen since December 2019. Versus the euro, the currency fell to the lowest level since April 2018, at 1.1997. The greenback may locate support around 1.37 against the pound and 1.24 against the euro.

The U.S. currency pared gains to 105.59 against the yen, from a high of 106.03 set at 8:00 pm ET. Further decline in the currency may find support near the 104 mark.

Looking ahead, PMI reports from major European economies, U.K. mortgage approvals data for July, German jobless rate for August, Eurozone inflation for the same month and jobless rate for July are scheduled for release in the European session.

The U.S. construction spending for July and ISM manufacturing for August will be released at 10:00 am ET.