* Dollar soft as U.S. relative strength in doubt
* Fed seen taking dovish stance amid coronavirus worries
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
By Hideyuki Sano
TOKYO, July 29 (Reuters) - The dollar languished near
two-year lows on Wednesday as the United States struggled to
contain a spike in coronavirus cases, dashing hopes for a quick
economic recovery.
The dour outlook for the world's largest economy is expected
to see the U.S. Federal Reserve sticking to a dovish stance at
its policy review later in the day, with dollar bears betting it
could hint of other ways to loosen policy further down the road.
The dollar index against six major currencies stood at
93.720 .DXY , near its lowest since June 2018 this week.
The euro traded at $1.1723 EUR= , up slightly on the day
though it has stepped back a tad from Monday's 22-month high of
$1.17815.
The dollar changed hands at 105.05 yen JPY= , near a
4-1/2-month low of 104.955 hit the previous session.
Its weakness stemmed from an eroding perception that U.S.
economic growth would be stronger than the rest of the developed
world and that investors could count on higher returns in the
dollar.
U.S. consumer confidence fell more than expected in July,
losing steam following two months of recovery, in a fresh sign
that rising COVID-19 infections are dampening consumption.
Four U.S. states in the south and west reported one-day
records for coronavirus deaths on Tuesday and nationwide cases
stayed high. "Given the concerns about the second wave of infections,
markets think the Federal Reserve is likely to take a dovish
policy stance," said Yujiro Goto, chief FX strategist at Nomura
Securities.
Investors will be watching for any indications that the U.S.
central bank will increase its purchases of longer-dated debt,
implement yield caps or target higher inflation than it has
previously indicated when it concludes its two-day meeting on
Wednesday.
Goldman Sachs on Tuesday noted that a potential Fed shift
"towards an inflationary bias" along with record high debt
levels by the United States government are raising "real
concerns around the longevity of the U.S. dollar as a reserve
currency."
Such worries are spurring a rush to gold, which last stood
at $1,963.5 per ounce XAU= , near its record high of $1,980.5
per ounce on Tuesday.
In fact, some market players think the dollar is long
overdue for a pullback after the Fed's unprecedented
money-printing since March to cope with a pandemic-triggered
recession.
The Fed's balance sheet has swelled about $3 trillion to as
high as $7.17 trillion, much faster than those of other central
banks as banks and corporates around the world sought dollar
liquidity to survive lockdowns, though the tally has shrank
slightly in recent weeks.
Also weighing on the dollar were uncertainties over an
additional fiscal package to support the economy.
Some Republicans in the U.S. Senate have pushed back against
their own party's $1 trillion coronavirus relief proposal while
Democrats have called for much larger support, including a full
extension of a $600-per-week enhanced coronavirus unemployment
benefit. The British pound fetched $1.2931, having hit a 4-1/2-month
high of $1.2952 GBP=D4 on Tuesday.
The Australian dollar traded at $0.7170 AUD=D4 , near its
15-month peak of $0.7184 touched a week ago, stepping back
slightly after data showed Australia's consumer prices fell by a
record in the second quarter. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Central bank balance sheets https://tmsnrt.rs/39zsw4S
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(Editing by Sam Holmes and Jacqueline Wong)