The dollar drifted lower on Thursday in choppy trading, after Federal Reserve Chair Jerome Powell struck a dovish tone, saying the U.S. central bank is not raising interest rates anytime soon and rejecting suggestions the Fed might start reducing its bond purchases in the near term.
The Fed's asset-buying program to support financial markets in a pandemic has weighed on the dollar, as it increased the supply of the currency and diminished its value.
The dollar, though, had traded higher for most of Thursday's session, in line with a rise in Treasury yields, amid upbeat expectations about President-elect Joe Biden's fiscal stimulus. But it changed direction as Powell spoke.
Powell said the economy remains far from the Fed's goals and he sees no reason to alter its highly accommodative stance "until the job is well and truly done." The Fed chairman was in a live-streamed interview with a Princeton University professor.
"This is the most powerful voice yet in terms of trying to damp market inflation angst ... (and) underscores, along with the new 'average inflation policy framework,' that the Fed won't be acting pre-emptively to rein in price pressures," said Action Economics in its blog after Powell's remarks.
In early afternoon trading, the dollar index was little changed to slightly lower at 90.26.
Investors also awaited details of Biden's pandemic relief plan. Since hitting a three-year low last week, the dollar has risen about 1.2%, as the prospect of more stimulus has weighed on U.S. government bonds, sending the benchmark 10-year Treasury yield above 1% for the first time since March.
The U.S. 10-year Treasury yield remained higher on the day, as Biden is expected to unveil a stimulus package proposal later on Thursday designed to jump-start the economy during the coronavirus pandemic with a lifeline that could exceed $1.5 trillion and help minority communities.
Since the beginning of the month, 10-year yields have climbed more than 20 basis points.
"With labor really struggling, there's an argument that we could push for a higher stimulus number," said Edward Moya, senior market analyst, at OANDA in New York. "In the end, markets are anticipating that we're going to see more stimulus than what is expected in Biden's first 100 days and that's why we're seeing the dollar holding up."
Expectations are high for the stimulus, but many analysts believe the spending push has already been priced in.
The euro eased 0.1% to $1.2151, despite positive news from the bloc's economic powerhouse. Germany's economy shrank by 5% in 2020, less than expected and a smaller contraction than during the global financial crisis, as unprecedented government rescue and stimulus measures lessened the shock of the COVID-19 pandemic.
The European single currency, however, is being weighed down by expectations that the European Central Bank will be monitoring exchange rates more closely. The euro has gained about 6.3% over the last six months.
ECB policymaker Francois Villeroy de Galhau said on Wednesday the ECB was keeping a close eye on exchange rate developments and their negative impact on inflation.
The dollar fell 0.1% versus the yen to 103.80.
Bitcoin held gains on Thursday after a slide of nearly $12,000 from last week's record high of $42,000. It rose about 5.7% to $39,515 on Thursday. It hit a session high above $40,000.
Interest in the cryptocurrency has surged as institutional investors began buying heavily, viewing it as both an inflation hedge and as exposed to gains if it becomes more widely adopted.