FOREX-Euro retreats after early gains; Swedish crown falls after Riksbank QE expansion

The euro retreated on Thursday, after briefly hitting a near three-month high against the dollar, as concerns about rising coronavirus cases in Europe grew. The dollar had earlier been on the defensive on downbeat U.S. economic data and optimism about coronavirus vaccines, but later in the session riskier currencies found it hard to maintain gains as key near-term uncertainties held back directional trades.

Germans will face restrictions on public life for the foreseeable future as the country tries to suppress the spread of the coronavirus and prevent its health system becoming overburdened, Chancellor Angela Merkel said on Thursday. "The U.S. dollar seems to want to go lower, but does not seem in any hurry to get there... Key support levels are looming in a growing number of dollar pairs, and the backdrop remains supportive for greenback sellers unless something comes along to spook robust global risk sentiment," said John Hardy, head of FX strategy at Saxo Bank.

The Swedish crown fell against both the euro and the dollar after Riksbank, the Swedish central bank, expanded its quantitative easing programme. Pressure had mounted on the U.S. currency earlier in the session also after Federal Reserve minutes on Wednesday signalled the central bank is likely to strengthen its quantitative easing programme at the next meeting in December.

Although a few Fed policymakers were hesitant to make near-term changes to the guidance, "many participants judged that the Committee might want to enhance its guidance for asset purchases fairly soon". Lee Hardman, currency analyst at MUFG, estimated that the new guidance could see the Fed commit to continue purchasing at least $120 billion per month of securities. However, the size of the QE programme might not necessarily be increased, Hardman said.

Still, "the developments support our view that loose Fed policy will remain a weight on the U.S. dollar next year." "We are wary in the near term though that the market is already very short U.S. dollars, which slows downward momentum and poses the risk of short squeezes," he said.

Euro/dollar was last trading down 0.2% at $1.1895 after rising to $1.1941, its highest since Sept. 1. An index which tracks the U.S. dollar against a basket of currencies was up 0.1% at 92.12, though earlier it had hit a near three-month low of 91.84 The Swedish crown was down 0.5% against the dollar at 8.5330 and 0.3% against the euro at 10.1490.

Other Scandinavian currencies also weakened after Sweden's central bank said it would expand and extend its asset purchase programme to support the economy through a second wave of the coronavirus pandemic as it kept its benchmark rate on hold at 0% as expected. Market watchers were wondering whether the European Central Bank will take a cue from the Riksbank and follow suit with its own QE programme.

The ECB's chief economist warned on Thursday that tolerating "a longer phase of even lower inflation" would hurt consumption and investment as well as cementing expectations for low price growth in the future. The Norwegian crown was also down 0.5% at 8.8855 against the U.S. dollar, after rising earlier to a three-month high of 8.8160, and fell by the same extent against the euro to 10.5685.

The Australian dollar was down 0.1% at 0.7358, though earlier it rose to a near three-month high of 0.7374, and the Canadian dollar was neutral at 1.3007 against the U.S. dollar. Sterling fell 0.3% to $1.3344 after rising to a three-month high of $1.3399, and was also down by 0.2% against the euro at 89.15 pence.