FOREX-Dollar falls as vaccine boost fades; yen set for worst week since March

The dollar slipped on Friday and risk appetite in currency markets eased, as worries about the economic fallout from surging COVID-19 cases in Europe and the United States tempered initial enthusiasm about a possible vaccine.

Global markets surged on Monday after Pfizer Inc said its experimental vaccine is more than 90% effective - news which saw the dollar rise as traders quit their long-yen positions. But traders became more risk-averse on Thursday and Friday, after the heads of the Federal Reserve and the European Central Bank stressed that the economic outlook remains uncertain.

"The rally on the markets following the US elections and the news of an effective vaccine has petered out," wrote Commerzbank FX strategist Thu Lan Nguyen in a note to clients. "However, the chances are high that the market will not go back into panic mode too quickly," she said, suggesting that an economic recovery in the U.S. could continue despite the rising infection rates. The dollar slipped in early London trading, down around 0.1% on the day at 0817 GMT at 92.884 versus a basket of currencies .

The safe-haven yen, which dropped around 2% versus the dollar on Monday, continued to claw back some of these losses, up around 0.1% on the day at 105.07. Despite the pullback, the yen was still on track for its worst week since March.

The Australian dollar - a liquid proxy for risk - was broadly flat on the day and slightly down on the week as a whole as caution about the economic fallout from the virus won out over optimism about a vaccine. The New Zealand dollar was down 0.2% versus the dollar at 0.6823, but up on the week after jumping to its highest since March 2019 after the Reserve Bank of New Zealand's meeting on Wednesday.

The euro was slightly up on the day at $1.18105 at 0824 GMT, ahead of euro zone Q3 GDP data due at 1000 GMT. "This figure is history now," Marshall Gittler, head of investment research at BDSwiss Group, wrote in a note to clients.

"Everyone's worried about what Q4 will look like with the lockdowns all over Europe," he said. European shares have dropped from their eight-month highs as European countries' lockdown measures to limit the spread of the virus challenge the narrative of a global economic recovery.

Germany's health minister said on Friday that it is too early to say how long the latest lockdown will last, while the French prime minister said France's measures would not be eased for at least two weeks. Versus the safe-haven Swiss franc, the euro extended its gains from earlier in the week, up more than 1% on the week as a whole, at 1.08105 at 0841 GMT.