* Fed shift last week hurts dollar demand
* Euro highest since May 2018, dollar at new low
* China’s yuan soars to strongest since May 2019
* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E (Adds details after inflation data, charts, updates prices)
LONDON, Sept 1 (Reuters) - The euro neared the $1.20 mark on Monday after it scaled another 28-month high and the dollar slipped to a multi-year low as investors bet the Federal Reserve’s policy framework meant U.S. rates would stay low for longer.
The euro reached $1.1997 in Asian trading hours, its strongest since May 2018, taking its gains to 7.5% in three months.
The Fed’s announcement last week that it would tolerate periods of higher inflation and focus more on average inflation and higher employment has encouraged traders to sell the dollar.
U.S. political uncertainty ahead of November’s presidential election and concerns about U.S. economic recovery have also weakened the greenback, with the euro the biggest beneficiary.
Euro zone flash inflation data for August was lower than expected as energy prices fell sharply but it did not reverse the euro’s gains.
ING analysts said “no imminent response from the ECB (European Central Bank) is likely and as the U.S. dollar outlook remains unappealing, the bias remains for higher EUR/USD this week”.
The euro was last up 0.3% at $1.1976.
The dollar index - which measures the U.S. currency against a basket of rivals - was down 0.3% at 91.917 at 1020 GMT after earlier hitting its lowest since April 2018.
PIMCO money managers said the dollar was “set to decline further” as the Fed keeps rates very low for years.
In previous depreciation cycles, they said the real trade-weighted dollar had fallen some 15% to 20% relative to current levels but even then the dollar would only be “marginally undervalued”.
The Chinese yuan brushed off concerns about diplomatic tension over Taiwan to reach its strongest since May 2019.
In offshore markets, the dollar fell 0.5% against the yuan to 6.8135.
Viraj Patel, FX and Global Macro strategist at Arkera, said China’s yuan rallying was a “sign of strong capital inflows”.
“But Beijing’s also allowing $USDCNY to move lower to avoid attention from the White House over its FX policy,” he added.
The dollar’s decline saw several other currencies hit milestones.
The British pound gained 0.7% to $1.3465, the highest since December, helped by dollar weakness and after Japan’s foreign minister said a broad agreement on a Japan-UK trade deal was close.
The dollar fell to 0.9002 Swiss francs, a shade above the lowest in more than five years.
The Australian dollar earlier hit its highest since August 2018, at $0.7413 before the rally fizzled.
Against the Japanese yen, the greenback eased 0.2% to 105.77 yen.
The yen had jumped last week after Japanese Prime Minister Shinzo Abe resigned on health grounds.
Editing by Ed Osmond and Barbara Lewis
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