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FOREX-Dollar sags after Trump takes aim at currency policies of US partners

* USD sags after Trump, Navarro take aim at Germany, Japan, China

* Dollar index in proximity of 7-week lows

* Fed policy decision due later, but much of focus still on Trump

By Shinichi Saoshiro

TOKYO, Feb 1 (Reuters) - The dollar sagged against its major peers on Wednesday after U.S. President Donald Trump and his top economics adviser took aim at the currency policies of key U.S. trade partners, further raising concern that Washington was poised to actively weaken the greenback.

Trump and trade adviser Peter Navarro on Tuesday criticised Germany, Japan and China, saying the three key U.S. trading partners were engaged in devaluing their currencies to U.S. disadvantage.

"Every other country lives on devaluation," Trump said. "You look at what China's doing, you look at what Japan has done over the years. They -- they play the money market, they play the devaluation market and we sit there like a bunch of dummies."

The dollar fell 0.9 percent against the yen on Tuesday in the wake of Trump's remarks, briefly touching a two-month low of 112.080. It pulled back a little to last trade at 112.705.

China's offshore yuan rose about 0.4 percent overnight.

The euro was steady at $1.0803 following a 1 percent gain overnight when it scaled a seven-week peak of $1.0812.

The common currency received a boost after Navarro told the Financial Times that Germany is using a "grossly undervalued" euro to gain advantage over the United States and its own European Union partners.

"It is becoming clear that the Trump administration is one that will pursue a weaker dollar and criticise the currency policies of others," said Shin Kadota, senior forex strategist at Barclays.

"Under such conditions, U.S. yields and the dollar are losing their correlation. Any rise in yields resulting from monetary policy expectations will no longer be able to support the dollar as much."

With Trump grabbing much of the headlines, the Federal Reserve's policy decision due later in the day was relegated to a side event.

The Fed is expected to keep interest rates unchanged when it concludes its two-day meeting later on Wednesday, in its first policy decision since Trump took office, as the central bank awaits greater clarity on his economic policies.

The dollar index against a basket of major currencies was up 0.1 percent at 99.556 after falling nearly 1 percent overnight to its lowest level since Dec. 8.

The Australian dollar, sensitive to shifts in risk sentiment, was down 0.2 percent at $0.7577. The New Zealand dollar was 0.3 percent lower at $0.7290.

(Reporting by Shinichi Saoshiro; Editing by Eric Meijer)