TOKYO (Reuters) - The dollar fell on Thursday after the U.S. Federal Reserve left the door open to more monetary easing and dampened expectations for a quick economic recovery from the coronavirus crisis.
The greenback also pulled back on signs the pandemic is receding in other countries and on reduced safe-haven demand for holding funds in dollars. Positive trial results for a drug to treat COVID-19 also boosted the appetite for riskier assets.
The euro edged lower before a European Central Bank meeting later on Thursday where policymakers are likely to expand debt purchases to include junk bonds and take other steps to ease conditions in credit markets.
China’s currency hit a two-week high on hopes over the potential virus treatment. Data also suggests the world’s second-largest economy is starting to slowly recover from the coronavirus-driven dive in activity even though the path ahead appeared bumpy.
More countries are taking steps to re-open their economies as coronavirus infections slow, giving some cause for optimism.
However, it will likely take several months for U.S. consumer spending to fully recover given the massive job losses, which has discouraged any extensive dollar buying.
“The Fed has already eased a lot, but the fact that it said it would be willing to do even more has taken some gloss off the dollar,” said Minori Uchida, head of global market research at MUFG Bank in Tokyo.
“I expect dollar/yen to drift lower. The euro can benefit from dollar weakness as long as euro-zone government bond spreads don’t widen a lot.”
The dollar fell slightly to 106.50 yen on Thursday, close to a six-week low.
Against the pound, the dollar stood at $1.2480, following a 0.3% decline on Wednesday.
The greenback was little changed at 0.9744 Swiss franc.
After a two-day policy meeting ending Wednesday, the Fed kept interest rates near zero and promised to expand emergency programmes as needed to help the battered economy.
Fed Chairman Jerome Powell offered no sanguine words about how fast the country might recover from the near-record low unemployment and slump in the economy as the pandemic hit the United States.
Data released on Wednesday showed U.S. gross domestic product contracted by 4.8% in the first quarter - the sharpest slump since the 2007-2009 recession.
Economists say the second quarter could be even worse.
The United States and other major economies forced businesses to close and kept people at home to slow the spread of the novel coronavirus, which slammed the brakes on global growth.
In the onshore market, the yuan rose to a two-week high of 7.0534 per dollar partly supported by data showing factory activity in China expanded, albeit at a slower pace, for a second straight month in April.
Chinese businesses are resuming work following the easing of shutdowns related to the coronavirus, which first emerged in the central Chinese province of Hubei late last year.
The euro eased slightly to $1.0866 on Thursday. Against the pound EURGBP=, the common currency fell 0.26% to 87.08 pence.
The ECB, which announces its policy decision later Thursday, is under pressure to keep government bond yields from rising after rating agency Fitch cut Italy’s credit rating to one notch above junk due to the financial burden of the coronavirus outbreak.
The ECB is already printing money at a record rate to buy up ballooning state debt.
However, European Union officials have struggled to agree the details of a joint recovery fund, which shifts the burden to the ECB, analysts say.
The Australian dollar rose to a seven-week high of $0.6565 on Thursday in a sign of improving risk sentiment among some investors.
The Aussie has also benefited from the country’s success in containing coronavirus infections.
The New Zealand dollar also hit a six-week high as economic activity returns following the end of one of the world's strictest lockdowns related to the coronavirus.
Reporting by Stanley White; Editing by Sam Holmes & Simon Cameron-Moore