The euro hovered near a seven-week low against the dollar on Friday after the European Central Bank was seen as more cautious than expected, while anxiety over China's coronavirus outbreak propped up the safe-haven yen. The euro changed hands at $1.1055, having touched a seven-week low of $1.1036 on Thursday. The currency flirted with five-week low against the British pound and 33-month low against the Swiss franc.
The ECB launched a broad review of its policy, seeking to redefine its main goal and how to achieve it, as years of the central bank's experiment with negative interest rates and quantitative easing have failed to deliver targeted inflation levels.
ECB President Christine Lagarde told a news conference that risks to growth in the euro zone remained tilted to the downside and traders took her overall tone as dovish. "Some people were hoping that Lagarde could talk about the possibility of policy normalisation after Riksbank ended negative interest rates late last year. But there was absolutely no such indication from her," said Kazushige Kaida, head of foreign exchange at State Street Bank.
Riksbank, the central bank of Sweden, ended five years of negative interest rates last month, despite a slowdown in the Swedish economy, a decision which many investors thought was made to allay concerns about side-effects such as housing bubble damages to pension funds. Purchasing Managers' Index (PMI) data from Germany and the euro zone due later on Friday is the next focus for the currency.
The common currency was also undermined by the coronavirus threat in China because some countries in the bloc, notably Germany, have big trade exposures to the Asian economic giant. Concerns about the spread of the new disease bolstered the yen, which traded at 109.45 yen to the dollar, having risen to a two-week high of 109.26 on Thursday.
The World Health Organisation (WHO) said on Thursday it was "a bit too early" to declare the new virus a global health emergency, providing financial markets with some relief.
Yet many investors were anxious as the epidemic spreads within China, killing 25 people in China and infecting more than 800. "The Lunar New Year holiday in China has just begun and they say the virus could be latent for about a week. So at least for the next couple of weeks it will be difficult to gauge how much the new disease will have spread," said Shinichiro Kadota, senior FX strategist at Barclays.
"That suggests the yen is likely to have a strengthening bias during this period," he added. Chinese financial markets will be closed through Thursday. Many other markets in the region will be shut on Monday. The offshore yuan was little changed at 6.9275 per dollar , after touching a two-week low of 6.9423 on Thursday.
The Australian dollar fetched $0.6843, having erased all of the gains made after a firm payrolls figure the previous day, and was on track for a fourth consecutive week of losses. Elsewhere, sterling traded at $1.3121, little changed on the day but up 0.9% so far this week as solid UK economic data prompted traders to wind back expectations of a rate cut by the Bank of England at its policy meeting next week. UK PMI data, due at 9:30 a.m. local time (0930GMT) on Friday, will be closely watched for any clues on the BoE's next policy decision on Jan. 30.
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