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FOREX-Dollar set for biggest 3-day drop since March before Fed decision

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

LONDON, Nov 5 (Reuters) - The dollar’s losses deepened on Thursday, setting it on course for its biggest three-day drop since the coronavirus-fuelled market selloff in March as traders braced for the outcome of a U.S. central bank policy meeting that might hint at more stimulus.

Traders also unwound some of their safe-haven demand for the greenback as Democrat Joe Biden moved closer to victory in the U.S. presidential race with election officials tallying votes in the handful of states that will determine the outcome.

But his party is falling short of expectations in Congressional elections, with the Senate looking increasingly likely to stay in Republican hands, making it hard to implement a big stimulus package.

Financial markets were braced for days or even weeks of uncertainty as incumbent President Donald Trump has opened a multi-pronged attack on vote counts in several states by pursuing lawsuits and a recount which is also widely seen as dollar negative.

“The Fed today is a bit of a sideshow but there is a chance it may strengthen forward guidance around potential quantitative easing and that would be dollar negative as you may also have less stimulus,” said Justin Onuekwusi, portfolio manager at LGIM.

Against a basket of its rivals, the dollar fell 0.7% to 92.71, its lowest level in more than a week. On a cumulative basis, the greenback has weakened 1.4%, its biggest three-day fall since March, according to Refinitiv data.

The dollar’s weakness was also compounded by a broad-based decline in U.S. Treasury yields with spreads between benchmark 10- and 2-year maturity debt tightening to its narrowest levels in more than three weeks.

With the final result of U.S. elections still uncertain, the Fed is expected to stick closely to its last statement and repeat its pledge to do whatever it can to help the economy through the coronavirus-triggered recession. The decision is due at 1900 GMT.

“The dollar will probably be caught between a haven bid on the uncertainty of the disputed election and a lack of interest in shorting the currency on the prospects of a potential Biden win,” said John Velis, an FX and macro strategist at BNY Mellon.

Some of the biggest gains were seen in currencies which had borne the brunt of Trump’s protectionist policies in recent years, with the Chinese yuan briefly rising to a more than two-year high versus the greenback.

The euro hopped above the $1.18 mark, up 0.9% from the previous session as some investors bet on a Biden victory.

“The euro was flying around in the last couple of days, to and fro, but in the end it does seem like the euro tends to be stronger under a Biden scenario,” said John Vail, chief global strategist at Nikko Asset Management.

The British pound neared $1.31 after the central bank ramped up its bond purchase plan.

Elsewhere, the Norwegian crown gained more than 1% versus the dollar after the central bank said it would maintain its accommodating policy until the economy shows clear signs of revival from the coronavirus pandemic.

Broader currency market volatility gauges declined with a widely-watched index falling to more than three-month lows .

Reporting by Saikat Chatterjee; Additional reporting by Sujata Rao and Stanley White in TOKYO; Editing by Gareth Jones, Emelia Sithole-Matarise, Kirsten Donovan

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