The dollar and the yen fell broadly on Thursday as growing hopes that the global economy may be over the worst of the recession diminished the attraction of those currencies perceived to be safer assets. Investors took heart from Wednesday's Federal Reserve statement pointing to an improved US economic outlook.
This fuelled strong gains in equities, with European shares up 2 percent, which boosted the euro while the Australian dollar - which is typically seen as higher risk - jumped, hitting a six-month high against its US counterpart. The optimistic tone of the Fed's statement offset earlier news that the US economy contracted sharply in the first quarter, keeping intact a broad improvement in sentiment and pushing the dollar to a 3-week low against a currency basket.
"Markets are still very much in a risk appetite mood and this looks set to continue for the time being," SEB currency strategist in Stockholm Carl Hammer said. The dollar came off earlier lows later in the session, however, as traders said some investors opted to buy the currency at more attractive levels, particularly given that several risk factors continue to lurk in the background.
The risk of the swine flu outbreak hampering the global economic recovery increased as the World Health Organisation said a pandemic was imminent, while reports emerged of an imminent bankruptcy filing by Chrysler. Market players also remain wary ahead of Monday's release of the US stress tests on banks.
At 1206 GMT, the dollar index, which tracks the US currency's performance against the nation's biggest trading partners, fell 0.2 percent to 84.455, having fallen as low as 83.885, its lowest since early April. The euro gained 0.1 percent against the US currency to $1.3280, though it was off an earlier two-week high of around $1.3384.
The higher-yielding Australian dollar gained 0.8 percent against the dollar to $0.7309, having earlier hit a six-month high of $0.7383. The yen was broadly weaker meanwhile, with the dollar up 0.6 percent at 98.08 yen and the euro rose 0.7 percent to 130.29 yen , not far from an earlier two-week high around 130.90 yen.
Data on Wednesday showing a rise in eurozone unemployment to 8.9 percent in March from an upwardly revised 8.7 percent in February underlined the view that the region's economy remains weak. Other data showed that eurozone inflation remained at a record low of 0.6 percent year-on-year in April, highlighting that although there have been some more positive signs the fundamental picture remains bleak.
"Risk continues to build over the next month or so and that will play as dollar negative," said Paul Robson, strategist at RBS in London. He cautioned, however, that risk demand was based more on "hope than reality". Market participants were watching Chrysler's last-ditch efforts to avoid bankruptcy ahead of a government-imposed restructuring deadline later in the day. The Wall Street Journal reported that those efforts had hit a roadblock, and bankruptcy was "all but certain".
Elsewhere, the New Zealand dollar rose 0.3 percent against the US dollar to $0.5682, but it was significantly outperforming its Australian counterpart after New Zealand's central bank cut interest rates. The Reserve Bank of New Zealand cut rates by 50 basis points to a record low 2.5 percent and pledged to keep them low for more than a year to fight the country's worst ever recession. The Bank of Japan kept rates unchanged at 0.1 percent and stood by its forecast for economic recovery by early next year.
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