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, 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.
"We got a whole lot of dovish soundbites as expected," said Erik Bregar, head of FX strategy, at Exchange Bank of Canada in Toronto.
"While we anticipated this dovishness to cool off the U.S dollar today, it felt like the FX market wanted to front-run this outcome a few hours beforehand...hence the hard-to-explain-in-the-moment swift move lower we saw going into midday and the 'sell the rumor/buy the fact' reaction we're seeing after Powell delivered."
In late afternoon trading, the dollar index was little changed to slightly lower at 90.24. 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.
"In the end, markets are anticipating that we're going to see more stimulus than what is expected in Biden's first 100 days," Edward Moya, senior market analyst, at OANDA in New York.
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.
The euro, 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 103.75.
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 $39,536 on Thursday, after hitting 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.
(Reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Alex Richardson, Matthew Lewis and David Gregorio)
By Gertrude Chavez-Dreyfuss
